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KAI RYSSDAL: It’s only Monday, but this is shaping up to be a big week for government bond deals. California is scheduled to sell $7 billion of its debt to investors. It’s the biggest offering of its kind since the state’s fiscal crisis four years ago. Ohio plans to offer more than $5 billion in tobacco bonds. The notes are going to be funded by Ohio’s share of that big tobacco settlement a couple of years back. Marketplace’s Amy Scott explains now why we may be seeing more deals like these in the near future.
AMY SCOTT: California sells bonds almost every year to bridge short-term gaps in its budget. But this year the state is borrowing almost five times as much as it did last year. Matt Fabian of Municipal Market Advisors says the housing recession has eroded California’s tax revenues. He predicts more states will turn to the bond market as the economy slows.
MATT FABIAN: State and local governments are in desperate need of funds in general. And they tend to borrow more as their budgets get tight. And we’re certainly headed into a period of more difficult financial times for the states.
Fabian expects municipal governments to sell $425 billion worth of bonds this year. That would be a new record. Ohio’s bond sale is a bit different from California’s. The state is one of 46 that settled with the major tobacco companies almost a decade ago. By selling bonds to investors, Ohio gets the settlement money up front. Gary Pollack invests in municipal bonds for Deutsche Bank Private Wealth Management. He says bondholders risk not getting paid as tobacco profits decline.
GARY POLLACK: These bonds are lower-quality bonds because the security comes from just four tobacco companies. And cigarette consumption is declining in the United States, so if you look at the cash flows, they are not improving, they’re just getting worse.
Tobacco bonds issued by other states have done well. They gained more than 7 percent last year, according to Merrill Lynch. If Ohio manages to sell all its bonds, analysts say it would be the largest tobacco deal yet.
In New York, I’m Amy Scott for Marketplace.
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