Pennsylvania Taps Debt Market After Gambling Vote

Pennsylvania and Arizona lead state and local governments set to borrow about $13 billion in the U.S. municipal bond market this week, and the increased supply may offer some bargains for investors.

Pennsylvania, which last week voted to expand table games at slot-machine parlors to raise revenue for budget gaps, will take bids from banks on $900 million of general obligation bonds, including $600 million of taxable Build America Bonds.

Arizona, one of the states hardest hit by home-mortgage foreclosures, will borrow $733 million to pay for services. This week’s sales include a $770 million issue by the city of Chicago. Weekly fixed-rate issuance last month averaged $6.2 billion, according to data compiled by Bloomberg.

“Deals will have to come attractively priced to move the supply,” said Tom Spalding, a senior investment officer at Nuveen Investments Inc. in Chicago who oversees $10 billion of municipal debt. “If you’re a believer that traditional tax- exempt supply is going to be limited in 2010, then it’ll be a fairly good opportunity to dip your toe in the water.”

Yields on municipal general obligation securities maturing in 20 years rose 0.06 percentage point, or 6 basis points, last week to 4.31 percent, according to the Bond Buyer 20 General Obligation Bond index.

Demand for municipal issues traditionally rises in January as bondholders reinvest coupon payments. At least $30 billion may be reinvested this month, said Rob Amodeo, a portfolio manager at Pasadena, California-based Western Asset Management Co., who helps oversee $40 billion of local government debt.

Build America

The federal Build America program, created by the February 2009 economic stimulus plan, will continue to sap supply of traditional tax-exempt debt to about $300 billion this year, Spalding said. The program, under which the U.S. Treasury pays 35 percent of interest costs, produced more than $60 billion in taxable issues by states and municipalities last year, and sales may reach $150 billion in 2010, according to Municipal Market Advisors.

Pennsylvania will come to market this week with the biggest-ever competitive auction of Build America Bonds to help pay for capital projects, including the expansion of the state convention center in Philadelphia, said Rick Dreher, the state’s director of the bureau of revenue, cash flow and debt.

Moody’s Investors Service rates Pennsylvania’s general obligations at Aa2, its third-highest investment grade.


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