Issuers from Vermont to Hawaii are coming to market in the next month, helping debt sales catch up to last year’s pace. States and cities have borrowed $261 billion through Nov. 14, compared with $267 billion for the same period last year, Bloomberg data show. For much of 2014, issuance trailed last year’s pace as localities balked at borrowing as they mend their finances five years after the recession.

Debtor Horde

Municipalities have scheduled about $10.5 billion of issuance for the next 30 days, the most for the period since 2010. That includes about $8.6 billion of deals this week. Some states and cities set deals less than a month before borrowing.

“There’s always a glut of issuance in this time period, and that supply has always served as a little opportunity to pick up a little bit more yield,” said Patrick Morrissey, who helps oversee $3.3 billion of fixed income for Great Lakes Advisors LLC in Chicago.

Renewed demand for tax-free securities may offset the increased issuance. Individuals added $649 million to muni mutual funds in the week through Nov. 12, the most in five weeks, Lipper US Fund Flows data show.

Muni investors will also have funds to put to work. Municipalities have announced about $21 billion of redemptions and $16 billion of debt matures in the next month, according to Bloomberg data.

California benefited from the bolstered demand, winning its lowest borrowing cost since 2007 in a $1.2 billion sale of general obligations on Nov. 13. The highest earners pay a 13.3 percent income tax to the most-populous U.S. state, in addition to a top federal rate of of 39.6 percent.

Following Flows

“If anything is going to diffuse a possible supply overhang, it would be strong muni fund flows,” Dillon said.

Individual investors are better positioned to step in and buy higher-yielding debt in the final weeks of 2014 than institutional buyers, who will look to sell and capture gains after the strongest yearly performance since 2011, Dillon said.

Morrissey at Great Lakes Advisors is among those selling. He’s shifting to shorter-maturity securities with the expectation that interest rates will rise in 2015 as the Federal Reserve raises its benchmark rate from near zero.

Ten-year Treasury yields will reach about 3.25 percent at this time in 2015, about one percentage point above current levels, according to the median forecast of 82 analysts in a Bloomberg survey.

Interest rates don’t always move according to plan. A year ago, the median forecast of 10-year Treasury yields for this quarter was 3.4 percent.

“You look at the return year-to-date and have to take into consideration that bonds as an asset class have had a most unexpected year,” Morrissey said. “Munis are part of that, so you’ve got to take some of that off the table.”
 

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