New York Delays $1 Billion Tobacco Bond Sale as Yields Rise

  • Junk-rated tobacco bonds drop 7.8 percent since start of month
  • Refinancing listed now as being on a day-to-day status

New York City postponed a $1 billion refinancing of debt backed by a national settlement with tobacco companies after the broader bond market sell-off, coupled with a cigarette-tax increase in California, sent yields surging.

Tobacco bond yields have risen 0.6 percentage point since the deal was announced last week. The securities are among the most liquid high-yield municipal bonds, making them prime candidates for fund managers to sell to meet redemptions. Yields rose to 6.43 percent Monday from 5.85 percent Nov. 7, according to Bloomberg Barclays Indexes. Returns on the junk-rated bonds in 2016 have tumbled by 7.8 percent since the beginning of the month.

“Our tobacco bond sale is no longer moving forward today as originally scheduled. Instead, the deal has been put on a day-to-day basis,” said Freddi Goldstein, a deputy press secretary for Mayor Bill de Blasio. “It’s my understanding that basically all of the refunding deals scheduled to be in the market this week have been either canceled or gone on a day-to-day basis."

Donald Trump’s election victory, which came with pledges to cut taxes, spend more than $500 billion on infrastructure and restrict imports, triggered a record selloff in global bonds. Yields on top-rated 30-year municipal debt have increased to 3 percent from 2.58 percent last week.

The rapid rise in borrowing costs led others to hold off on selling bonds. Los Angeles International Airport, the third-busiest in North America, postponed a $436 million issue for capital projects. The Washington Suburban Sanitary District, which provides water and sewer service for Montgomery and Prince George’s Counties, Maryland postponed a $155.2 million refinancing, thought it went forward with another sale to finance public works.

Tobacco bonds were affected in part by California’s vote last week to increase taxes on cigarettes by $2 per pack, which could dampen sales and reduce legal settlement payments from tobacco companies that back some of the securities issued by state and local governments. California accounts for about a tenth of all cigarette sales nationally.

Moody’s Investors Service said Nov. 14 that the tax increase is “credit negative for tobacco settlement bonds because it will reduce national tobacco consumption.”

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