By Jeremy R. Cooke
Nov. 16 (Bloomberg) -- New York City led borrowing this week by U.S. state and local governments with a $1.1 billion sale of general obligation bonds, tapping the market amid renewed demand for municipal bonds after a three-week decline.
The Bond Buyer 20, a weekly benchmark of municipal yields, fell for the first time since last month, as investors absorbed $5 billion of new debt, including bonds from Honolulu, the University of North Carolina and Columbus, Ohio. Long-term issuance held below the year's average for a third week.
Buyers are taking advantage of relatively attractive tax- exempt yields that in some cases exceeded the rates on taxable Treasuries. Investors have blamed the recent underperformance versus U.S. federal bonds on concerns that bond insurers' credit will weaken and investment banks' demand will slacken because of the slump in debt backed by subprime mortgages.
``We definitely still have uncertainty about what the losses are going to be on all these subprime issues, but at the same time, there's a comfort level that there's more liquidity in the market,'' said Dan Solender, who oversees $9 billion in funds as director of municipal bond management at Lord Abbett & Co. in Jersey City, New Jersey.
The average yield on top-rated 30-year tax-exempt bonds was 4.58 percent yesterday, based on an index compiled by Municipal Market Advisors. The Treasury bond at that maturity was 4.52 percent, representing a spread not seen in 20 months.
``Yields as a percentage of Treasuries are pretty high,'' Solender said. ``That seems like it's bringing investors back because of the value.''
Fund Outflows
The earlier declines may have led to mutual-fund investors pulling $444 million out of long-term municipal-bond funds during the week ended Nov. 14, according to AMG Data Services. That marks the first net weekly outflows since last month and the largest amount since August.
The rise in borrowing costs since late October prompted at least two of the week's largest planned borrowings to be postponed, keeping bond sales below the 2007 weekly average of $6.7 billion, according to data compiled by Bloomberg.
Chicago put off a nearly $1 billion borrowing for the city- owned O'Hare International Airport that was to refinance debt as well as help fund the facility's plan to reconfigure runways and boost capacity.
In Louisiana, Westlake Chemical Corp. shelved a $250 million offering of high-risk, high-yield securities. If sold, the bonds will be tax-exempt under a 2005 federal law allowing tax-exempt borrowing to boost economic development in hurricane- damaged areas of the Gulf Coast.
Deal Revived
A Florida deal previously scheduled for three weeks ago came to market after Port St. Lucie added a guarantee from MBIA Inc., the world's largest bond insurer, to $156 million of special-assessment debt that would not have otherwise carried credit ratings.
MBIA has a low risk of downgrade, Moody's Investors Service and Fitch Ratings said in recent releases about pending reviews of capital cushions at bond insurers.
Honolulu, the city-county government that oversees more than 70 percent of Hawaii's population, sold $403 million of bonds to fund capital spending around the island of Oahu.
The debt will be insured by Financial Security Assurance Holdings Ltd., whose likelihood of needing to raise capital or risk jeopardizing its AAA rating was rated ``minimal'' by Moody's and Fitch.
North Carolina, Columbus
The University of North Carolina at Chapel Hill, with ratings one level below AAA, raised almost $300 million for campus improvements with its revenue bond sale. Columbus auctioned $228 million of top-rated bonds for public works around Ohio's capital and most-populous city.
New York City opted to forgo insurance this week in selling almost $950 million of tax-exempt bonds and auctioning $125 million of debt with interest subject to federal income taxes. Finance officials also plan to sell $100 million of variable- rate demand obligations without insurance on or about Dec. 4.
The city of 8.2 million people is rated two levels less than AAA by Standard & Poor's and three below the top grade by Fitch and Moody's.
New York collected $250 million of priority orders from individual investors beginning last week and then $1.8 billion from institutions such as mutual funds and property-and-casualty insurance companies on Nov. 14.
More-than-sufficient demand on the day of final pricing allowed underwriters led by Citigroup Inc. to raise prices and trim yields by 1 to 3 basis points on various maturities 10 years and longer. A basis point is 0.01 percentage point.
To contact the reporter on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net .
