WASHINGTON — The U.S. Treasury Department announced Tuesday that it will suspend the sales of state and local government series securities on Friday at noon, eastern standard time.
Once the suspension is effective, it will be in place until further notice, Treasury said.
"This suspension is necessary by reason of the statutory debt ceiling," Treasury said in a release. "The suspension will assist Treasury's management of the debt subject to limit."
Congress has suspended the debt ceiling through Friday, after which time it will be reinstated. SLGS count against the debt limit, so suspending sales stops further increases that would be counted against the limit if they continued to be issued.
SLGS are purchased by municipal bond issuers that are subject to arbitrage rebate or yield restriction requirements of the tax code and want to avoid violating them. Issuers often purchase SLGS for advance refunding escrows to ensure their investment yield will not significantly exceed the yield of their refunding bonds and that they will not violate yield restriction requirements. SLGS can be specially tailored so that their maturities match the maturities of any municipal securities being refunded.
The Internal Revenue Service's Revenue Procedure 95-47 provides guidance for issuers about what to do when the SLGS window is closed.
Subscriptions for SLGS received by the Treasury's Bureau of the Fiscal Service before noon on Friday will be issued on the date requested. However, new subscriptions for SLGS will not be accepted during the suspension, Treasury said.
"This is becoming an all-too-common occurrence, and the market has adapted," said Sam Gruer, managing director at Cityview Capital Solutions, LLC. He added that it's fairly easy for issuers to use open-market Treasury securities instead of SLGS if they have competent advisors. The yield on open-market securities often exceeds the yield on the SLGS that would be available but for the window being closed, he said.
