Munis Start Unchanged to Slightly Firmer

The municipal market opened the week unchanged to slightly firmer in light trading, gearing up for heavy new-issue supply in the coming days.

"Market's a little better today," a trader in Chicago said. "People feel a little more comfortable in the secondary. The bid side has gotten back close to the offer. It's been somewhat of a quiet day."

In the secondary market, a total of 34,782 trades were made with a par value of $7.05 billion yesterday, according to Municipal Securities Rulemaking Board data reported by Thomson Reuters. Traders said there was particular interest in the intermediate range, which has struggled in recent weeks.

"They're creeping a little bit," a trader in Chicago said. "There's more interest, spreads have come in. There's definitely some interest at these percentages and yields right now. There's more interest today than there has been."

As of Friday's close, the triple-A muni scale in 10 years was at 88.8% of comparable Treasuries, according to Municipal Market Data. Additionally, 30-year munis were 101.8% of comparable Treasuries. As of the close Friday, 30-year tax-exempt triple-A general obligation bonds were at 108.0% of the comparable London Interbank Offered Rate.

In the new-issue market yesterday, JPMorgan priced for retail investors $329 million of water revenue bonds for the San Diego Public Facilities Financing Authority. The bonds mature from 2010 through 2029, with term bonds in 2034 and 2039. Yields range from 2.29% with a 3% coupon in 2012 to 5.56% with a 5.5% coupon in 2039. Bonds maturing in 2010 and 2011 were decided via sealed bid. The bonds, which are callable at par in 2019, are rated Aa1 by Moody's Investors Service and AA-minus by Standard & Poor's and Fitch Ratings.

Elsewhere, JPMorgan began soliciting indications of interest on $89.8 million in taxable general revenue Build America Bonds it's pricing for the regents of the University of Michigan.

In addition, a number of sizeable offerings will be priced in the primary market this week.

Leading the pack is a $1 billion sales tax revenue offering from Dallas Area Rapid Transit, which is slated to be priced by Siebert, Branford Shank & Co. today. The deal contains $360 million of term bonds maturing 2034 with a 10-year call and $478 million of taxable BABs with a make-whole call. There will also be a $162 million tax-exempt portion maturing from 2014 to 2022. The credit is rated Aa3 by Moody's and AAA by Standard & Poor's.

Citi will price $750 million sale of taxable consolidated revenue bonds for the Port Authority of New York and New Jersey Thursday. The deal consists of three term bonds maturing in 2019 and totaling $150 million, in 2024 and totaling $250 million, and in 2029 totaling $350 million. The credit is rated Aa3 by Moody's and AA-minus by Standard & Poor's and Fitch.

The total competitive and negotiated volume expected this week is $7.73 billion, according to Ipreo LLC and The Bond Buyer. Banc of America Securities Merrill Lynch municipal strategist Philip Fischer wrote in his weekly note that the municipal market is likely to see about $40 billion in new issuance, including taxables, for the month.

Supply rather than demand concerns are likely to drive the municipal market moving forward in the near term, Janney Montgomery Scott LLC fixed-income strategist Guy LeBas wrote in his weekly note. June and July have traditionally seen issuance spikes in the muni market.

Between 2005 and 2007, tender-option bond programs and arbitrage funds devoured supply, which "blunted the traditional seasonal effects of underperformance," he wrote. The absence of these buyers could mean a reversion to the volatility in these months.

"When you consider the potential for a greater pace of issuance in the coming weeks along with the smaller availability of sponge-like demand structures, it's evident we could see substantially elevated volatility in the municipal market for the near term," LeBas wrote. "That volatility also has the potential to elevate the negative impact of call options' value, though the flatter yield curve should counteract at least a portion of this last effect."

The heavy issuance along with a rise in Treasury yields and a low yield of municipals compared to Treasuries led to a weaker market last week, according to Morgan Stanley Smith Barney's George Friedlander. The "challenge" in placing the large Puerto Rico Sales Tax Financing Corp. deal also led to a "backup in the high-yield sector," he wrote in a weekly note.

The Bond Buyer 40-bond municipal bond index fell to 104-28 on Friday from 105-25 a week earlier. The yield on a triple-A, 30-year GO bond rose to 4.73% at close Friday from 4.66% a week earlier, while the yield on a single-A, 30-year GO rose to 5.57% from 5.48%, according to Municipal Market Data.

The Treasury market showed some gains yesterday. The yield on the benchmark 10-year note, which opened at 3.79%, was quoted late in the day at 3.73%. The yield on the two-year note was quoted late Monday at 1.22% after opening at 1.26%. The yield on the 30-year bond, which opened at 4.65%, was quoted late Monday at 4.58%.

In economic data released yesterday, the Empire State Manufacturing Survey reported the general business conditions index widened to negative 9.41 in May from negative 4.55 in May. Economists surveyed by Thomson Reuters had expected the index would be negative 4.50.

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