Least Sales Since '11 Offer Cushion Against Losses: Muni Credit

The steepest losses in almost three years for U.S. municipal debt may wind up helping bondholders. Issuers jolted by rising yields are scaling back sales to the slowest pace since 2011, helping limit declines in the $3.7 trillion market.

From California to New York, localities may postpone or reduce borrowings in the second half of 2013 after benchmark 10-year yields reached 2.96 percent in June, the highest level since April 2011, data compiled by Bloomberg show. Interest rates soared last month on speculation the Federal Reserve will reduce its bond purchases as the economy improves.

With higher yields making it harder to refund debt, top-rated Georgia and New York’s Metropolitan Transportation Authority, operator of the biggest U.S. transit system, delayed or canceled sales last month. Refinancings were down 20 percent in the first half of 2013 from a year earlier, according to George Friedlander, chief muni strategist in New York at Citigroup Inc., the third-largest U.S. bank by assets.

“Less issuance will help keep interest rates from rising too dramatically,” said Gary Pollack, who oversees $6 billion of munis as managing director in Deutsche Bank AG’s private-wealth unit in New York. “It will be a buffer against rising interest rates.”

Slow Down

The municipal market lost 3.3 percent last quarter, the most since 2010, Bank of America Merrill Lynch data show.

With the borrowing slowdown this year, Citigroup cut its 2013 issuance forecast about 13 percent to $350 billion, which would be the least since 2011. Localities are pulling back on borrowing as investors withdrew $4.5 billion from muni mutual funds in the week through June 26, the most since Lipper US Fund Flows began tracking the data in 1992.

Issuers led by Illinois sold $24.4 billion of long-term, fixed-rate debt last month, the slowest June in two years, data compiled by Bloomberg show.

The amount of debt maturing or being redeemed surpassed borrowings by almost $60 billion in June, the biggest negative-net-issuance since at least July 2012, when Bloomberg began tracking the data.

Stability Prospect

Local borrowings exceeded the amount of maturing or redeemed debt in only three of the past 12 months. Municipalities sold $166 billion of bonds in the first half of 2013, the least since the same period in 2011.

“To the extent that a decline in new-issue volume supports prices, I’m happy as an investor because my market will be steady and stable if I need to sell,” Pollack said.

Georgia, with the highest grade from all three major credit-rating companies, last month canceled a refinancing because of the spike in interest rates, said Lee McElhannon, director of bond finance for the state’s financing and investment commission. The refunding required the state to hold bond proceeds in an escrow account, where Treasury yields failed to match those on muni bonds, he said.

“It was not only the increase in the muni rates,” McElhannon said. “It was that municipal rates increased faster than Treasury rates and threw off the ratios.”

Ratio Runup

At 4.17 percent, yields on benchmark munis due in 30 years compare with the 3.49 percent interest rate on comparable-maturity Treasuries. The ratio of the two, at 119 percent, is the highest in a year, Bloomberg data show. The higher the figure, the cheaper tax-exempt bonds are in comparison.

Georgia has yet to pick a date for the refinancing deal. Officials are watching the market for a future opportunity, McElhannon said.

Refinancing is set to slow as states and cities in the past year have already taken advantage of historically low interest rates, he said. The refundings that remain have a smaller opportunity for savings, McElhannon said.

“The low-hanging fruit has already been picked,” he said.

After postponing the deal June 20 because of rising interest rates, the MTA this week sold $334 million of revenue bonds that will refund debt. The U.S. bond market was shut yesterday for the Independence Day holiday.

States and cities are poised to offer $12 billion of long-term debt in the next 30 days, down from $17 billion on June 25, close to a 10-month high.

The planned issuance includes a $2.9 billion revenue deal, the biggest muni sale this year, from Texas’s Grand Parkway Transportation Corp. to help finance a new toll road in the Houston area.

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