Munis Mostly Unchanged With Weaker Tone

The municipal market was largely unchanged yesterday with a slightly weaker tone, as Minnesota eliminated the refunding component of its originally scheduled $906 million deal slated for later this week.

“There’s really not much movement out there at this point,” a trader in New York said. “There’s a bit of activity here and there, but we’re pretty unchanged overall. It’s kind of quiet, and I think we might have just hit a level late last week where we’re going to have some stability for a bit. I guess time will tell.”

“You’re maybe seeing a little hint of weakness out there, but it’s very slight, and only in spots,” a trader in Los Angeles said. “It’s overwhelmingly flat, if that makes any sense. But if you had to press me for a tone, I’d say we’re very slightly weaker in that regard. But I definitely wouldn’t call it a basis point weaker or anything like that.”

The Treasury market was mixed yesterday. The yield on the benchmark 10-year note, which opened at 3.41%, was quoted near the end of the session at 3.38%. The yield on the two-year note finished at 0.97% after opening at 0.95%. The yield on the 30-year bond, which opened at 4.25%, finished at 4.19%.

Also yesterday, the Municipal Market Data triple-A scale yielded 3.05% in 10 years and 3.73% in 20 years, following levels of 3.04% and 3.73%, respectively, Friday. The scale yielded 4.08% in 30 years, matching Friday’s level of 4.08%.

As of Friday’s close, the triple-A muni scale in 10 years was at 89.1% of comparable Treasuries, according to MMD, while 30-year munis were 96.0% of comparable Treasuries. Thirty-year tax-exempt triple-A rated general obligation bonds were at 98.3% of the comparable London Interbank Offered Rate.

Issuers plan to price an estimated $11.69 billion of new deals this week, according to Ipreo LLC and The Bond Buyer. Participants are hoping the market continues to recover some of the ground it gave up last week when weakness put a damper on primary activity as yields rose by at least 10 basis points in the intermediate slope of the curve and forced postponement of at least two large deals.

A revised $5.12 billion priced last week, according to Thomson Reuters, but not every deal originally scheduled made it to market. The yield backup caused Merrill Lynch & Co. to postpone its $655 million Hawaii GO refunding sale, while RBC Capital Markets followed suit by placing its $385 million Houston Independent School District offering — which was to include $151 million of taxable BABs — on the day-to-day calendar.

The latest name added to the list is Minnesota, which eliminated the refunding component of its planned $906.2 million of general obligation bonds this week. The $475 million now offered will be available to institutions on Thursday, following a two-day retail order period today and tomorrow led by Barclays Capital.

The postponed refundings “could become a barrier to a near-term market rebound, since they remain an overhang in a market that has struggled recently to handle new issue supply without a significant yield correction,” George Friedlander, muni strategist at Morgan Stanley Smith Barney, wrote in a weekly report. He noted the extent of the barrier will be determined by whether flows rebound.

Also this week, an approximately $1.1 billion revenue financing on behalf of Catholic Health Initiatives planned for pricing Thursday by Morgan Stanley hopes to benefit from declining rates that brought some recovery to the market last Thursday and Friday. The multi-state two-tranche CHI deal — being issued by the Colorado Health Facilities Authority, the Kentucky Economic Development Finance Authority, and Montgomery County, Ohio — consists of $762 million of Series 2009A and $322 million of Series B. Retail investors will get first crack at the bonds tomorrow. The bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.

Additionally, in a three-pronged deal planned for tomorrow, the Alabama Public School and College Authority will issue $775.8 million of capital improvement and refunding bonds, to be priced by Morgan Stanley, and structured to mature from one to 20 years and rated double-A by the three major rating agencies. The bonds — limited, uninsured obligations of the authority payable with pledged revenues — consist of $539.2 million of Series 2009A refunding bonds, $198.5 million of Series 2009 B refunding bonds, and $38.1 million of Series 2009C capital improvement bonds.

In the new-issue market yesterday, Wachovia Bank NA priced $122.3 million of GO refunding bonds for triple-A rated Charlotte, N.C., which mature from 2010 through 2029. The bonds mature from 0.39% with a 3% coupon in 2010 to 3.78% with a 5% coupon in 2029. The bonds are callable at par in 2019.

In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote that “October’s correction has effectively erased September’s gains, but prices, at least for high-grade paper, appear to have stabilized.”

“Higher nominal yields are attracting retail investors,” Fabian wrote. “The issues, of course, are whether or not: the loss of momentum will precipitate systemic mutual fund outflows; the nascent balance in the high-grade space can be maintained amid this week’s stronger tax-exempt supply; and the high-yield market will be able to find near-term support.

“It does appear likely that, if the high-grade market has not yet reached a bottom, one isn’t far off — the factors that attracted individuals, money managers, and banks haven’t changed since the summer,” he said. “But pricing and liquidity uncertainty, hedging difficulties, and our sector’s sometimes loose, sometimes tight connection to a volatile Treasury market should encourage caution when putting borrowed or customer capital to work.”

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER