University of California debt tops U.S. municipal bond calendar

WASHINGTON, March 28 Fri Mar 28, 2014 2:07pm EDT

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WASHINGTON, March 28 (Reuters) - New sales in the U.S. municipal bond market will continue to shrink next week, even with the University of California issuing nearly $1 billion in debt.

Thomson Reuters data shows that municipal bond sales will total $3.94 billion next week, compared to a revised $5.15 billion this week. Almost all of that, $3.17 billion, will be on the negotiated calendar.

The largest sale of the week, set for Thursday, is $968.24 million in tax-exempt and taxable debt from the Regents of the University of California, with Wells Fargo Securities acting as lead underwriter. More than half of the deal, $559.5 million, will be tax-exempt.

The higher education system's negligible operating margin led Fitch Ratings to cut its credit score last month to AA from AA-plus. The University of California institutions were long considered a point of pride in the Golden State, but California's years-long budget battles caused funding for the system to fall and its operations to suffer.

The competitive calendar remains thin next week, dominated by a Wednesday sale of $120 million for the Lancaster County School District in Nebraska.

At the beginning of this month, the U.S. municipal bond market was flooded with $3.5 billion in Puerto Rico bonds, the largest municipal junk bond sale ever. But for most of 2014, new issuance continued to run light, as rising interest rates make borrowing and refinancing unattractive. The amount of outstanding debt fell to $3.671 trillion at the end of the 2013, the smallest amount in five years.

Still, interest rates have dropped lately, which could lure some issuers back to market or entice them to borrow more than they had planned. From Monday through Thursday the yields on top-rated 10-year bonds fell 7 basis points on Municipal Market Data's benchmark scale to 2.47 percent. Those on highly rated 30-years dropped by even more, 11 basis points, to 3.61 percent, according to MMD, a Thomson Reuters company.

The largest deal of this week, Atlanta's airport refunding bonds, grew to $846.49 million from the originally planned $705.6 million. Likewise, on Tuesday the New York City Municipal Water Finance Authority increased its planned sale of $484.42 million in bonds to $547.85 million. It also cut yields in many maturities, by as much as 3 basis points.

(Reporting by Lisa Lambert; Editing by Leslie Adler)

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