(Bloomberg News) Investors hunting higher yields are turning to securities that make up 17 percent of municipal bond sales while generating almost half the defaults.
Tax-exempt conduit bonds -- sold by governments for private companies, hospitals and non-profits -- due in 10 years yielded 1.06 percentage points more than top-rated general-obligations yesterday. That's down from a one-year high of 1.34 percentage points last month, according to data compiled by Bloomberg.
Investors are ignoring the largest municipal-bond default this year and speculation about a bankruptcy by American Airlines parent AMR Corp., a backer of conduits sold by U.S. airports. They're willing to take the risk for yields as high as 8 percent, said Tim Pynchon, who helps oversee $4 billion of municipal bonds at Boston's Pioneer Investment Management Inc.
"You're being well-compensated for what are typically well-thought-out projects," said Pynchon. "From a value standpoint, that sector is very interesting."
Jefferson Parrish Hospital Service District No. 2 in Louisiana sold $170 million of debt this week for East Jefferson General Hospital, a 420-bed facility outside New Orleans. A tax- exempt security due in July 2041 rated BBB- by Standard & Poor's, one level above junk, was priced to yield 6.5 percent.
That translates into a 10 percent return for someone in the 35 percent income-tax bracket. Taxable Treasury bonds maturing in 30 years yielded about 3.2 percent yesterday.
"There's a lot of value in taxable-equivalent yield," said John Miller, co-head of fixed-income at Chicago-based Nuveen Asset Management, which supervises $100 billion.
State and local governments issue tax-exempt bonds for non- government borrowers such as airlines building airport facilities or non-profit developers of senior housing. That allows private entities to borrow at lower tax-exempt rates.
The government lends only its name to the bond sale and doesn't pledge any of its own revenue, which means the repayment depends solely on the borrower, known as the obligor.
Conduits made up just 17 percent of the $2.3 trillion of municipal bonds sold since 2007, according to data compiled by Bloomberg. Still, almost half of the 78 defaults this year have been conduits, according to Matt Fabian, managing director with the Concord, Massachusetts-based research firm Municipal Market Advisors. Only one general-obligation bond defaulted, according to Fabian: Brighton, Alabama, a city of 2,945 near Birmingham.