Citigroup Inc. lowered its projection of municipal-debt issuance this year by 8.6 percent to $320 billion after Detroit’s bankruptcy helped push up borrowing costs to the most in two years.
Interest rates on benchmark munis maturing in 30 years soared to 4.56 percent last week, the highest since May 2011, data compiled by Bloomberg show, after the Motor City entered the largest U.S. municipal bankruptcy in history on July 18. Interest rates have been rising since May on speculation that the Federal Reserve would scale back its bond purchases.
As yields increase, states and localities will have fewer opportunities to refund debt for savings, George Friedlander, chief muni strategist at New York-based Citigroup, said in a report released today. Refundings will drop in the second half of 2013 by 50 percent, or $44 billion, from the first six months of the year, according to the report.
“The key factor in this additional cut is that the latest spike in yields is making a significant portion of potential refunding volume unprofitable,” Friedlander said in the report.
Citigroup projected 2013 borrowings at $400 billion at the start of the year. That was reduced to $350 billion in June as yields rose. The $320 billion estimate is the lowest since 2011, when states and municipalities sold $258 billion of long-term, fixed-rate debt, data compiled by Bloomberg show.
Investors have pulled about $15.5 billion of cash from muni mutual funds in the eight weeks through July 31, the most since February 2011, Lipper US Fund Flows data show. Yields on top- rated, 30-year local debt climbed to 4.55 percent Monday from 4.35 percent on July 17, the day before Detroit filed for bankruptcy.
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