Yields on single family state housing finance agency bonds are “attractive” as credit spreads for such bonds are above historical levels, according to a report released this week by Janney Capital Markets.

“In this extremely low, and still falling, interest rate environment, we are very surprised that investors have not migrated in droves over to the SF HFA housing bond sector,” said Tom Kozlik, municipal credit analyst at Janney.

“State HFA credit quality remains very strong and we have maintained our stable outlook on the housing sector.”

Janney is recommending that investors consider these single family housing bonds at their current levels.

The report shows that the spread in yield for a 10-year, double-A rated housing bond is currently 104 basis points over the comparable triple-A Municipal Market Data benchmark. That is 35 basis points above its historical average.

The 10-year, double-A housing bond is also about 78 basis points above a 10-year, double-A rated municipal revenue bond.

Credit spreads increased during the financial crisis in 2007 and 2008, when the housing market collapsed, an event that directly impacted state HFA credit quality. During the recession, HFA mortgage delinquencies and foreclosures jumped to record levels, and investors began to focus on credit concerns.

In the fall of 2007, HFAs dumped auction-rate products after that market imploded for the “safety” of variable-rate modes, Kozlik wrote in the report.

“This volatile period did not result in widespread downgrades, however, as most HFAs were and remain strong financially and are actively run by very experienced management teams,” Kozlik said.

At the beginning of 2007, the yield for the 10-year, double-A housing bond was around 26 basis points above the generic double-A rated revenue bond, according to Thomson Reuters data. At the beginning of 2008, it had gone up to 64 basis points, and by 2009, it hit 100 basis points and has remained hovering around those levels.

Now that concerns of potential negative credit implications have receded, Kozlik said that investors are now focusing on structure quality, like they were prior to 2007.

“The worst of the credit fallout to SF HFA credit quality has occurred and is over,” he said. “Investors are (or should be) transitioning back to concentrating on structure and redemption considerations versus credit.”

Structure considerations include the type of debt and its redemption priority, or how a particular bond’s coupon compares to all outstanding resolution debt. They also include the issuer’s ability and likelihood to cross-call and the likelihood of unexpended proceeds redemptions.

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