That has increased demand for new issues, driving down the extra yields that the riskiest borrowers pay and allowing some to weaken the protections given to bondholders in the securities contracts.
AMG Vanadium LLC sold $307 million of debt through an Ohio agency to build a factory that will turn waste into a product that’s used in the production of steel. The company, which is responsible for paying on the debt, didn’t give bondholders a mortgage on its property in the event it defaults, as is commonly done. The sale was oversubscribed anyway, allowing the underwriter to price the 30-year securities for a yield of 4.28%. The bonds continued to climb after they were sold.
Investors bought up $1.75 billion in unrated municipal bonds for Virgin Trains USA’s private rail project in Florida. A California factory seeking to create a wood alternative has tapped the market more than once. The new sales-tax-backed debt issued this year by Puerto Rico has gained, pushing the price above full face value, even though the island was rocked by protests that forced the resignation of the governor and has yet to emerge from a record bankruptcy.
“It is a very aggressive market -- but to say that it is frothy means that this is the end of it, and I don’t know,” said Matt Fabian, a partner with Municipal Market Analytics, an independent research firm. “A year from now, we might be yearning for the discipline of 2019.”
Some money managers have started to pull back. Vanguard Group Inc. has cautioned against taking too much risk as the economy’s record-long expansion makes a recession look overdue. Goldman Sachs Group Inc. earlier this year shifted a record amount of its high-yield municipal fund into investment grade debt, anticipating that some of the projects financed by the securities may run into distress.
Through July, about 33 municipal bond issues defaulted, the fastest pace since 2015 and up from 21 during the same period in 2018, according to Fabian’s firm. That included a California plant that converts medical waste into hot gases, recyclable metals and glass, just years after issuing the unrated debt in 2016 and 2017.
But with the market still delivering outsize gains, mutual funds have a powerful incentive to stay put, given that they’re judged by the performance relative to their peers.
Guy Davidson, chief investment officer of municipal investments at AllianceBernstein, said he’s grappled with the performance of the company’s so-called high-income municipal fund. It’s up 9.7% this year, beating nearly 90% of its peers. “You go, gosh, is it time to take money off the table?” he said.
He hasn’t, anticipating that the high-yield market will be supported by the still-growing U.S. economy. “A bubble implies it’s supposed to pop,” he said. “Fundamentally, it doesn’t feel like there’s things that are going to make it pop.”
Foley, the Denver-based portfolio manager, was once a big buyer of tax-exempt bonds issued to build new housing developments in his booming state, but he has since stopped amid signs that the market has gotten frothy.