Muni Sales Dry Up as States Face $42 Billion Deficit

The worst year for municipal bond investors since 1999 may further reduce demand for tax-exempt debt just as state governments face the biggest budget deficits in at least a quarter-century, according to published reports.
State and local borrowers sold $385 billion of long-term bonds through yesterday, down 9 percent from 2007, according to data compiled by Thomson Reuters. Next year, sales will drop more than 6 percent to about $364 billion, the least since 2004, based on an average of estimates from London-based Barclays Plc, Merrill Lynch & Co. and Loop Capital Markets LLC.
The combination of the worst financial crisis since World War II and the collapse of the $330 billion auction-rate debt market will leave 41 states and the District of Columbia with shortfalls just as financing sources diminish. Merrill Lynch’s Municipal Master Index, which tracks 14,000 bonds, fell 4.6 percent this year, the first decline since a 6.34 percent drop in 1999. The biggest underwriters are merging or leaving the business.
A freeze in global credit markets this year drove municipal borrowing costs to unprecedented levels. Yields on AAA general obligation bonds due in 30 years rose to a record 2.2 times Treasury yields from the historical average of about 0.96 times, according to Concord, Massachusetts-based Municipal Market Advisors. That represents an extra $2.93 million a year in interest on every $100 million of debt sold.

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