De Blasio blows off bond signals

May 28, 2014

Thomson Reuters MMD

Have the bond vigilantes begun to crack the whip at New York City Mayor Bill de Blasio? Capitol New York reports:

According to a report in Bloomberg News [May 21], UBS Global Asset Management and RidgeWorth Capital Management Inc. will each reduce their holdings of [New York City] debt due to concerns over the 8 percent in retroactive raises included the mayor’s proposed contract with the United Federation of Teachers, and his $8.2-billion affordable housing plan.

‘We’re concerned with what Mayor de Blasio might do in working with the unions, things like this housing project that he’s looking at with not having a full understanding of how he’s going to pay for it,’ Ebby Gerry, who works for UBS, told Bloomberg News. ‘We’re watching pretty closely.’

Public officials have been trained to monitor what credit rating agencies say, so de Blasio’s response, which brushes off sales by institutional investors of New York City debt is no surprise. Capitol New York again:

Mayor Bill de Blasio brushed off news on Wednesday that two financial management companies will reduce their holdings of city debt over concerns about his fiscal stewardship.

‘I want to emphasize to everyone here, there’s a difference between the financial firms you describe versus the ratings agencies,’ de Blasio told reporters after an education-related press conference at a Bronx High School Wednesday afternoon.


New York City has more than $40 billion of outstanding general obligation bonds. New York City debt maturities are heavily loaded on the short end of the maturity curve. This poses a risk to the city if interest rates move higher at the time that the city must refinance its debt.

According to Thomson Reuters Municipal Market Data Senior Analyst Dan Berger, who developed a weekly NYC 10-year general obligation data set, New York City bonds moved only 6 basis points (each a 100th of a percent) between May 16 (average yield 2.54 percent) and May 23. This shows that Bloomberg’s UBS story had a minimal impact on muniland. Because New York is a high-tax state with many wealthy taxpayers, the bonds that UBS sold were likely snapped up immediately, putting little pressure on prices.

The most precise way to examine changes in municipal bond prices is to look at the “spread,” or difference between the price of a bond and a benchmark bond. For general obligation bonds, muniland uses the AAA GO bond as a benchmark. This is necessary because the entire municipal bond market is moving up and down in response to the US Treasury market. The chart above shows New York City GO spreads compared to the AAA GO benchmark.

Berger wrote about NYC GO bonds in a note to clients:

MMD has noticed some spread widening since late last week in the 10 year range. City officials are dismissing this talk as a means for investors to ‘talk down’ NYC debt to obtain higher yields. New York City plans to issue $850 million of refunding bonds during the week of June 9th.

Many forces interact on muniland bond prices. It’s often difficult to parse specific causes and effects of movement. UBS may be an early harbinger of pressure from bond investors or it simply may be trying to talk the bonds down ahead of the upcoming $850 million refunding sale.

Because New York City relies heavily on tax revenues from Wall Street, I share the concerns of UBS, but that is a story for another day.

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