Record Debt Set for Week
By Michelle Kaske and Andrea Riquier
States and localities are poised to borrow the most in a year in a bet that investors in
the municipal market, which has beaten U.S. stocks, Treasuries and commodities, will
be undeterred by the record bankruptcy of Alabama’s Jefferson County.
Issuers from Hawaii to Massachusetts are set to offer $12.2 billion of securities this
week, the most since November 2010, according to data compiled by Bloomberg. The
wave follows the biggest weekly flow into municipal-bond mutual funds in a year.
Tax-free securities rallied last week even as Jefferson County, struggling with $3 billion
of sewer-system debt, filed the biggest U.S. municipal bankruptcy on Nov. 9. The 10-year
tax-exempt yield dropped 11 basis points, the most in three weeks. Its ratio to interest
rates on equivalent-maturity Treasuries fell to a two-week low of 108.9 percent as yields on U.S. government debt rose.
Jefferson County isn’t “a trigger for anything further,” Joseph Pangallozzi, a credit analyst at BlackRock Inc., said on a conference call last week. “This is not the beginning of a rush to bankruptcy.”
Investors pulled more than $30 billion from municipal-bond mutual funds from November 2010 to June on concern that the fiscal strain from the longest recession since the 1930s would increase government-debt defaults. The worries didn’t materialize as state tax collections headed for their seventh quarter of growth, according to data from the Nelson A. Rockefeller Institute of Government.
This year, municipal defaults through September totaled $949 million, compared with $2.9 billion in the first nine months of 2010, according to the Distressed Debt Securities Newsletter.
Jefferson County’s Chapter 9 filing followed bankruptcies involving Central Falls, Rhode Island, in August and Harrisburg, Pennsylvania.
Yields on top-rated municipals due in 10 years have fallen four straight weeks, the longest stretch since May. Ten-year tax-exempt debt yields 2.24 percent, down 34 basis points from Oct. 13.
Falling rates have encouraged borrowing to refund debt sold at a higher cost, Chris Mauro, a municipal strategist at RBC Capital, said in a Nov. 4 report. About 67 percent of the week’s 10 biggest sales, which total $6 billion, are refundings, according to data compiled by Bloomberg.
Rates may need to rise this week to attract enough buyers, said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.
“You’ll probably see a little bit of a move up in yields to clear that supply, but then the calendar’s going to start dropping notably when we reach the holidays,” Pietronico said. “And then we’ll get some of our rally back in terms of yields moving lower.”