A Bond Too Far

An unintended consequence of the U.S. bailout of its financial markets seems to be a crowding out of borrowers from the bond market.

On Wednesday, the Port Authority of New York and New Jersey failed to draw bidders on a $300.0 mllion issue of taxable municipal bonds. Although that does not seem to create an immediate funding crisis for the agency, which manages bridges, tunnels, airports and transit in New York City and northern New Jersey, it's a disquieting sign that investors are shying away from bonds with any kind of risk in favor of burgeoning supplies of Treasury bonds and their near equivalents.

Although the Port Authority has double-A-minus bond ratings -- which mean its chance of not paying off its debts are remote -- the market is digesting a flood of bonds from commercial banks that can take advantage of a U.S. government guarantee, making them essentially triple-A-rated obligations of the Treasury.

“The taxable bond market is flooded with paper currently, a large part of that supply coming from the Federal Deposit Insurance Corp.-backed debt being raised by the Troubled Asset Relief Program-supported banks,” said Matt Dalton, chief executive of Belle Haven investments in White Plains, N.Y. “The natural buyers for taxable debt of this type are the insurance companies which are currently under stress with the rest of the world.”

The style of the offering was also detrimental, requiring potential buyers to bid for the bonds by saying what interest rates they would accept. Alternatively, an issuer could higher underwriters to negotiate an offering with potential buyers, a method that doesn't always offer the issue the lowest interest rate but does make it easier to place all its bonds.

Dalton said banks and brokerage houses "do not have the room to take on a competitive deal of this size without having the bulk of it spoken for,” he said. “In this environment deals this size have a better chance going the negotiated rout rather than competitive.”

On its website, the bistate agency said "the transaction was held well in advance of the need for capital funds, as is the Port Authority’s standard practice, and the lack of bids will have no impact on any current Port Authority capital projects. We are confident that the markets will recover in the upcoming year when we plan to return with another sale." Separately, it said its board would meet in a closed session on Thursday, though it did not say what would be discussed.