Borrowing costs for highly rated states, cities and other public entities in the US have dropped from the crisis levels of last year to below historical norms, reflecting demand from retail investors as well as federal subsidies for the $2,700bn municipal bond market.
The market for municipal bonds – or “munis” – was hit hard when the financial markets froze up last year, prompting calls for government support and greater oversight by regulators. Attractive yields and income tax breaks unique to this type of debt have attracted individual investors to the asset class.
The development of so-called Build America Bonds has also improved financing conditions. Under the stimulus package, muni issuers receive a subsidy for 35 per cent of the interest if they sell fully taxable bonds to fund infrastructure projects. Through this programme, issuers have raised a total of $27bn this year, according to Thomson Reuters.