The Port Authority of New York and New Jersey will begin selling $1 billion in 40-year bonds today. Proceeds will be used to fund construction at the World Trade centre site.
However, falling Treasury rates, which act as a benchmark to municipal bonds, are making it cheaper to borrow in the bond markets.
According to Bloomberg, the new issue is priced at a spread of 175 to 185 basis points above the 30-year Treasury bond. Last October, the Port Authority sold $850 million in 30-year bonds at a 5.65% yield, or 176 basis points above the same benchmark.
While spreads remain the same, the benchmark Treasury rate is much lower. The 30-year Treasury yield is 3.08% versus around 3.75% last October. This means the Port Authority’s borrowing rate is significantly lower.
Here’s a one year chart of the 30-year Treasury.
Photo: Yahoo Finance
Bond investors are attracted to municipal issues because they offer a more attractive return than Treasuries. As such, demand for quality municipal bonds will likely keep spreads steady as Treasury yields remain low. And therefore, organisation like the Port Authority should be able to borrow on the cheap.
So, who can we thank for falling rates?
Well, falling Treasury rates are often explained by the fear trade, as investors shift money out of risk assets and into safe havens.
However, another popular explanation as of late is operation twist, or the Federal Reserve’s plan to lower long-term interest rates. In fact, many argue that operation twist has been pricing into the yield curve far before the Fed’s actual announcement.
As such, we think Ben Bernanke and the Federal Reserve deserve at least partial credit for making it cheaper to finance the reconstruction of the World Trade centre site.
Construction on the tower hit stride in 2010 and today steel is at the 82nd floor, according to spokesman Steve Coleman. The Port Authority expects to complete work on the 1,776 foot skyscraper in the fourth quarter of 2013. The new bonds, rated AA- by Fitch, will mature in 2051 and will help the authority finance the $11.6 billion downtown project.
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