By Jeremy R. Cooke Sept. 25 (Bloomberg) — Benchmark borrowing costs for highly rated state and local governments dropped to a 42-year low this week, as the pace of new municipal-bond issues slowed and cash flowing into mutual funds accelerated to a record. Municipal issuers led by Ohio sold about $6.3 billion of fixed-rate bonds with final maturities longer than 18 months, down from $9.9 billion last week , according to data compiled by Bloomberg. California borrowed $8.8 billion, selling notes at yields of 1.5 percent and 1.25 percent, which will be paid off by the end of its fiscal year that began July 1. The weekly Bond Buyer 11 -Bond index, which tracks tax- exempt yields on 20-year general-obligation debt with an average Aa1 rating, fell 14 basis points, or 0.14 percentage point, to 3.79 percent, its sixth straight decline. That’s the lowest since May 1967, when Lyndon B. Johnson was U.S. president. “Even though absolute yields are quite low by historical standards, the municipal yield curve is still steep,” said Jamie Iselin, a senior portfolio manager on a team that oversees about $11 billion in municipal bonds at Neuberger Berman LLC in New York. “Investors are getting paid more than they historically would to move out on the curve.” Yield curves chart what investors are accepting to lend for different periods. The Bloomberg Fair Value yield indexes for top-rated general obligation bonds are at 0.75 percent for two- year issues and 4.41 percent for 30-year bonds. The gap is 153 basis points wider than its 10-year median. Out of Cash, Into Bonds Investors pulled out $8.46 billion from tax-free money- market funds yielding an average 0.06 percent during the week through Sept. 22, said iMoneyNet of Westborough, Massachusetts. Cash flowed into municipal bond mutual funds at a record four-week moving average of $2.7 billion through yesterday, topping the $2.6 billion high reached Sept. 16, Dow Jones Newswires reported, citing data compiled by Lipper FMI of Thomson Reuters. The single-week inflow of $1.8 billion also set a new high, beating the previous week’s $1.52 billion. The Municipal Master Index has returned 7.5 percent since the end of June, heading for the best quarterly performance since Merrill Lynch & Co. started compiling the total-return gauge in 1989. Treasuries are up 1.7 percent during the quarter and corporate bonds have gained 8 percent, according to other indexes from Merrill, now part of Bank of America Corp. Moving in a ‘Straight Line’ “Portfolio managers often get annoyed when a market moves in a straight line, with yields just dropping,” said Tom Dalpiaz , who manages municipal bonds for individuals at Advisors Asset Management in Melville, New York. “The bonds in your portfolio, they’re going up in value, that’s a great thing, but each day the merchandise gets more expensive.” Even with the record fund flows, this year’s rally in municipal bonds has an “artificial or manufactured feel” because of the creation of Build America Bonds, Dalpiaz said. The federal stimulus program created in February offers partial interest subsidies to states and localities selling taxable debt for otherwise tax-exempt government projects. BAB issuance reached $33.7 billion this week, Bloomberg data show. While tax-exempt bond yields have fallen to historic levels, “I wouldn’t suggest that people go to cash,” Dalpiaz said. “You’re better off just putting some to work bit by bit, steadily and deliberately, trying to stay invested.” Municipal bond sales are poised to rise next week to about $8 billion, led by New York City and the Los Angeles Unified School District, each planning to offer more than $1.5 billion in tax-exempt and Build America bonds. Following are descriptions of some pending sales of municipal bonds and notes. Timing is subject to change. LOS ANGELES UNIFIED SCHOOL DISTRICT plans to raise $1.6 billion by selling a mix of tax-exempt securities, Build America Bonds and additional taxable debt without federal subsidies. Underwriters led by Citigroup Inc. and Goldman Sachs Group Inc. will handle the deal, which will fund improvements and refinance debt of the second-largest U.S. public school system after New York City’s Department of Education. The Los Angeles district also intends to sell an undetermined amount of Qualified School Construction Bonds, which provide investors with federal tax credits and may or may not include supplemental interest payments, based on preliminary bond documents. (Added Sept. 25) CEDARS-SINAI MEDICAL CENTER plans to borrow $535 million by selling fixed-rate revenue bonds as soon as next week in a deal arranged by the California Health Facilities Financing Authority and Bank of America Corp.’s Merrill Lynch & Co. The Los Angeles- based hospital will use the money raised to fund construction of its Advanced Health Sciences Pavilion and other capital projects. The tax-exempt bonds will mature from 2010 through 2027 and carry Fitch Ratings’ fifth-highest A+ rating and Moody’s Investors Service’s sixth-highest A2 rating. The latest deal will increase the hospital’s long-term debt load by more than 70 percent to about $1.2 billion. (Added Sept. 25) VIRGIN ISLANDS PUBLIC FINANCE AUTHORITY plans to sell $476.1 million of bonds to fund public works in the U.S. Caribbean territory and refinance debt issued in 1998. Capital projects include improvements to emergency management services, schools, roads, parks, water lines, libraries, police stations and waste management. All except $6 million will pay interest exempt from federal, state and local taxes. A group of banks led by Citigroup Inc. will underwrite the deal. The bonds are backed by matching fund revenue derived from federal excise taxes collected on Cruzan rum exported to the U.S. from St. Croix. Moody’s Investors Service rates all of the bonds Baa2. Standard & Poor’s and Fitch Ratings rank the $102.6 million of debt with a subordinate lien on revenue BBB- and the senior bonds BBB, one level higher. (Added Sept. 25) NORTH CAROLINA, the 10th most-populous U.S. state, will sell $400 million of its top-rated general-obligation bonds through competitive interest-cost bidding among underwriters on Oct. 6, according to Fitch Ratings. The transaction will replace higher-interest debt. North Carolina has $5.2 billion in GO debt and $1.7 billion in appropriation-backed bonds outstanding. (Added Sept. 25) VIRGINIA will take bids Oct. 6 from investment banks seeking to underwrite $253 million of general-obligation bonds. The offering will raise almost $150 million for new capital projects as well as refinance debt. Virginia is one of seven U.S. states to carry top long-term ratings from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. The state had $8.7 billion in net tax-supported debt as of June 30, according to Fitch. (Added Sept. 25) NEW YORK CITY, the largest issuer among municipalities in the U.S., plans to sell $1.83 billion of fixed-rate general- obligation debt next week, including its first issue of Build America Bonds. The city wants to raise $800 million under the program that provides 35 percent interest-cost rebates from the U.S. Treasury. It also intends to offer $900 million of tax- exempt bonds to refinance debt and $130 million of taxable securities without federal subsidies. Underwriters led by Morgan Stanley will handle the taxable portion and Bank of America Corp.’s Merrill Lynch & Co. will lead those on the tax-exempt side. New York is rated Aa3 by Moody’s Investors Service, AA- by Fitch Ratings and AA by Standard & Poor’s. (Added Sept. 23) ARIZONA’S SALT RIVER PROJECT, the public power utility for almost 1 million Phoenix-area customers, plans to sell $375 million of long-term bonds via competitive interest-cost bidding among underwriters on Sept. 29. Maturities will range from 2013 through 2037. The proceeds will be used to pay off short-term commercial paper. Standard & Poor’s rates the bonds AA; Moody’s Investors Service grades them Aa1. (Added Sept. 23) To contact the reporter on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net .
