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Capital Markets

US state treasurers turn to foreign investors

When budget deficit issues in Illinois hit the headlines earlier this summer, you could almost sense a sigh of relief from California. Illinois has a deficit of $13 billion, compared with California’s $19 billion, but that is 2% of its GDP whereas California’s deficit is just 1%. In the CDS market, it is more expensive to insure against default for Illinois than California now.

Investors, however, seem undeterred, particularly those outside the US. Illinois’ $900 million Build America Bond (a tax-exempt municipal bond subsidized by the US government) issued in May was oversubscribed, and much of the interest was from foreign investors. The state’s debt manager, John Sinsheimer, roadshowed the bond in Europe and Asia, where other state treasurers have also been marketing aggressively. There are no firm data to show how much they have been buying but Fed funds flow to foreign investors has increased.

Thomas Doe, founder and chief executive at muni research and advisory firm Municipal Market Advisors, says there is a perception that BABs are more marketable abroad than in the US. "US investors tend to buy smaller blocks of BABs, and they are more sensitive to credit risk because they hear more about it," he says.

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