(Bloomberg News) Want to win the Oregon or Florida lottery? Don't purchase tickets. Buy their bonds instead.
Oregon's AAA rated bonds, whose historic default risk is near zero, are backed by lottery revenue and compare with odds of one in 176 million to win the multistate Mega Millions jackpot. Since November, yields on the debt have dropped almost seven times as much as those on top-rated municipal securities as interest rates in the $3.7 trillion market have fallen to lows not seen since the 1960s.
Florida and Oregon are among four U.S. states that have sold $5.5 billion in bonds backed by cash from games of chance, mostly to fund school construction, said Natalie Cohen, a senior analyst at Wells Fargo & Co. who wrote a report on lottery revenue this month. Mega Millions, played in 42 states and the District of Columbia, awarded a record $640 million jackpot after a March 30 drawing.
"In economic good times and bad times, people want to play the lottery," said Terry O'Grady, senior vice president of muni trading at FMS Bonds Inc. in North Miami Beach, Florida. "Lottery revenues, while they are discretionary, are not going to be that volatile."
Of the 43 states with lotteries, 26 saw revenue grow in the past fiscal year, with total sales up 3 percent to $56 billion, according to Rockville, Maryland-based research firm La Fleur's. Florida, Texas and California each pulled in more than $1 billion in 2010 from lotteries and other forms of gambling, while New York generated $2.2 billion, according to Cohen.
Lottery bonds maturing in 2025 issued by the Oregon Department of Administrative Services traded last week at a yield of 2.21 percent, down 120 basis points from 3.41 percent five months earlier, according to data compiled by Bloomberg. That beat the 18-basis-point drop in yields on top-rated 13-year debt over the same period, Bloomberg Valuation index data show. A basis point is 0.01 percentage point.
The Oregon agency sold about $75 million in lottery-backed debt April 11, about two weeks after the Mega Millions drawing. A $54 million portion included 10-year securities priced to yield 2.27 percent, Bloomberg data show. That's 38 basis points below similarly rated revenue debt. The agency issued lottery debt three years ago with yields 19 basis points above the index.
Standard & Poor's gives the Oregon lottery debt its top AAA grade, one level higher than the state's Aa1 ranking.
"It really is an asset-backed security -- it's not a state credit," said Joe Deane, who helps oversee $16 billion as head of munis in New York for Pacific Investment Management Co., which manages the world's biggest bond fund. "The amount of money you can raise is just astronomical."
Still, revenue may drop as more states legalize other forms of gambling, such as casinos, Deane said. New York and Massachusetts are among states seeking to open Las Vegas-style gambling houses.