Muni market concerns look overblown
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
The normally staid U.S. municipal bond market is making headlines for all the wrong reasons. Yields on tax-exempt bonds, the parking lot for wealthy investors looking for tax breaks, have soared this week, a mini meltdown that has prompted the Gwinnett County Water and Sewerage Authority and others to pull more than $3 billion of deals.
There’s room for vigilance, especially given the steady drumbeat of warnings about the finances of state and local governments. The latest market weakness, however, seems to be rooted not in the corridors of Sacramento, Springfield or other state capitols but in extraordinary — but temporary — supply and demand factors that have whipsawed a market known for its illiquidity.
First, the $24 billion of new muni debt originally slated for this week was perhaps more than double the usual supply. That was bound to cause indigestion, especially after a spike in 30-year Treasury yields that was partly triggered by the Federal Reserve’s latest bond-buying program.
Issuers should perhaps have known better than to try to shift so much paper. But it’s hard to blame them when the expiry of a key federal subsidy could soon disrupt their market further. The Build America Bond or BAB program, which involves the feds subsidizing taxable borrowing by state and local governments, has lured as much as 25 percent of new bond issues away from the traditional tax-exempt market this year. If the program isn’t extended beyond the end of December, investors in the tax-exempt muni world could gain the upper hand as borrowers flood back.
Despite all this, though, issuers have been getting deals away. California, for instance, still sold a record amount of debt. It had to pay a little extra — debt due next year priced at a yield of 1.75 percent rather than the 1.5 percent the state had hoped — but it raised $10 billion at rates that are still very low.
With any uncertainty over BABs and the unusual glut of supply likely to be short-lived, the jitters shouldn’t last. Sure, the municipal bond market isn’t without longer-term challenges. Cities, counties and municipalities are vulnerable if the economy doesn’t pick up — and defaults aren’t as remote as they once seemed. But unlike, say, the fundamental concerns about Greece and Ireland in Europe, there’s little to suggest impending trouble for big states like California. The fire feeding the recent alarm doesn’t look like it has much more fuel.