Shifting buyer base will boost borrowing costs, increase focus on credit

A shift in the municipal bond buyer base away from mutual funds might mean an uptick in borrowing costs for states and local governments and a more credit-focused investment strategy.

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Fitch Ratings said it raised Chicago's general obligation bonds and issuer default rating to BBB from BBB-minus and the raised the rating on the Sales Tax Securitization Corp.'s sales tax securitization bonds to AA from AA-minus.

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Prestigious private universities and colleges, like Stanford, MIT and Harvard, have been issuing corporate CUSIPs since the mid-2010s, at a time when they were doing major expansion projects and rates were attractive, said Barclays strategist Clare Pickering. This was an opportunity, she said, to tap into U.S. names of brands that crossover buyers were fully aware of, with high-quality, double- or triple-A-rated issuers.

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With the University of Puerto Rico under increasing financial pressure, the full payment of its roughly $365 million in bonds appears to be under threat.

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Municipals sold off Friday with losses of up to 18 basis points, with the damage felt across the curve, and the 30-year triple-A yield closed just shy of 4%. U.S. Treasuries ended mixed after the 10-year rose to levels not seen since 2007 earlier in the session, and the reversal led to an equity rally to close out a tumultuous day and week.