May 24, 2016 / 4:40 PM / a year ago

UPDATE 2-Connecticut pays more to borrow following downgrades

(Adds analyst comment, details of fund manager holdings)

By Edward Krudy

NEW YORK, May 24 (Reuters) - The premium Connecticut pays to borrow in the municipal bond market rose during the state's debt sale on Tuesday, as investors demanded higher yields following two ratings downgrades.

Fitch Ratings and Standard & Poor's cut Connecticut's debt rating one notch to 'AA-' last week, citing reduced resilience in the event of an economic downturn.

Lawmakers have had to slash spending by nearly $1 billion for the coming fiscal year due to falling revenue projections.

Investors are cautious about buying the state's debt given the weak economy and large public pension liabilities.

"Connecticut is a bit of a difficult state," Brian McGreevy, a portfolio manager at Columbia Threadneedle Investments, said in a phone interview. "I see a little more downside than I see upside."

Columbia's Connecticut municipal bond fund had $160 million in assets as of the end of April, spokeswoman Liz Kennedy said. The firm manages $464 billion of assets, including $24 billion in municipal bonds, she added.

McGreevy said liquidity in Connecticut's debt could be constrained as some investors favored higher-rated states.

"That has the potential to force these spreads wider going forward," said McGreevy. He said he was not a buyer in the state's latest offering.

Connecticut sold $512.9 million of general obligation debt, with the sale pricing for institutional investors on Tuesday. The preliminary yield of the 10-year general obligation debt was 2.33 percent, 70 basis points over the AAA benchmark, according to data complied by Thomson Reuters.

Randy Smolik, an analyst at Municipal Market Data, said some investors might have been holding off as they awaited large offerings next month by prominent issuers such as the states of Washington, Georgia and Pennsylvania.

Connecticut's Office Of the State Treasurer did not respond to a request for comment. Bank of America Merrill Lynch, a co-lead manager, declined to comment. (Reporting by Edward Krudy; Editing by Dan Grebler and Richard Chang)

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