Starved muni market awaits $850 mln New York City debt sale

NEW YORK, June 6 Fri Jun 6, 2014 5:02pm EDT

NEW YORK, June 6 (Reuters) - New York's Mayor Bill de Blasio has little to fear from bond vigilantes when the city goes to market next week with an $850 million general obligation refinancing deal, the city's first bond deal since the mayor inked a multibillion dollar deal with city labor unions in May.

A scarcity of new bonds and a reach for yield in the $4 trillion municipal bond market this year mean the city's debt will likely get a good reception, allowing de Blasio to press ahead with his big-ticket, progressive agenda without fear of investors punishing him with higher borrowing costs.

"This placement is going to go very well. There's so much appetite right now, people are so hungry for paper, and this is a very high-quality bond," said Diederik Olijslager, a fund manager at USAA Investments, who helps oversee a $200 million New York State muni bond fund.

A two-day retail order period for the bonds starts on Monday. Morgan Stanley is the senior manager on the negotiated deal.

Interest rates in muni market recently hit their lowest in a year as the supply of new bonds declined sharply. Spreads over the city's 10-year general obligation debt and top-rated munis were at their lowest in over a year in mid-May and although climbing this week to hit 0.48 percentage points on Thursday are still in line with their average over the last year. The city's 10-year debt yields roughly 2.75 percent.

New sales in the muni market will total $8.76 billion next week, with the sizable New York deal and a $1.70 billion sale of Los Angeles Unified School District bonds lifting issuance to its highest in three months, and well above this year's average weekly issuance of $5 billion.

At over $70 billion, New York City has a budget bigger than many states and is a major debt issuer in the muni market. The city is rated AA by the three big ratings agencies, a high investment grade, has strong budgetary oversight, and a strong a diverse local economy.

That is not to say there is no concern after the city reached a deal with city teachers that could cost close to $20 billion through 2021, not including healthcare savings, when applied to all city workers. The deal has helped create budget gaps of $2.2 billion to $3.2 billion from 2016 to 2018, according to the city's estimates.

"The outside year gaps have increased significantly but they're probably of the same magnitude that we saw after the 2008-2009 period so they're probably manageable," said Brian McGreevy, who co-manages Columbia Management's $250 million New York Intermediate Municipal Bond Fund. (Reporting by Edward Krudy; Editing by Lisa Shumaker)