Munis Quiet as Large Calendar Looms

The municipal market was largely unchanged yesterday amid fairly light secondary trading, ahead of a substantial new-issue calendar slated for this week.

“There’s not a whole lot trading as of now, and it’s pretty flat out there,” a trader in New York said. “It is a pretty big new-issue week, though, so we should see a nice pickup in activity as the week goes on. But for now, it’s fairly quiet.”

The Treasury market was mixed yesterday. The benchmark 10-year note finished at 3.80% after opening at 3.78%. The yield on the two-year note finished at 0.89% after opening at 0.91%. The yield on the 30-year bond finished at 4.73% after opening at 4.71%.

The Municipal Market Data triple-A scale yielded 2.89% in 10 years and 3.83% in 20 years yesterday, matching Friday’s levels. The scale yielded 4.19% in 30 years yesterday, also matching Friday.

Friday’s triple-A muni scale in 10 years was at 76.5% of comparable Treasuries and 30-year munis were at 89.0%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 92.5% of the comparable London Interbank Offered Rate.

An estimated $6.95 billion of new issuance is expected this week, according to Ipreo LLC and The Bond Buyer.

The New York City Transitional Finance Authority will dominate the primary market with a multifaceted sale of future tax-secured bonds totaling $900 million.

The deal has five subseries, the largest of which are Series F-1 and F-2, which are taxable subordinate bonds being issued as direct-pay BABs totaling $620 million. In addition, Series F-3 and F-4 are traditional taxable subordinate-lien bonds that total $130 million.

The $306.7 million Series F-1 and $68.1 million Series F-3 are being sold competitively today.

Series F-1 is the TFA’s first-ever competitive BAB sale. The $313.3 million Series F2 and $61.8 million Series F-4 will be privately placed by the authority with the New York State Division of Lottery.

Competitive pricing will largely determine the yields on the private placement.

Series F-1 and F-2 are tentatively structured to mature from 2018 to 2030, with term bonds in 2035 and 2040. Series F-3 and F-4 are tentatively structured to mature from 2012 to 2018. The TFA’s outstanding future tax-secured subordinate bonds are rated Aa2 by Moody’s Investors Service, AAA by Standard & Poor’s, and AA-plus by Fitch Ratings.

In addition to the four series of fixed-rate bonds, the authority is also expected to issue $150 million of future tax-secured tax-exempt subordinate, adjustable-rate bonds as Subseries F-5 on or about the larger transaction’s March 3 closing date.

Miami-Dade County will sell $600 million of water and sewer system revenue bonds, beginning with a retail order period yesterday before today’s pricing by senior book-runner Raymond James & Associates.

The deal — the first of five annual offerings to finance 83% of a five-year, recently revised $4.2 billion capital improvement program — is comprised of all fixed-rate, tax-exempt debt and is tentatively structured to mature from 2011 to 2030, with term bonds in 2035 and 2039.

Moody’s rates the debt A1 and maintains a stable outlook, while Standard & Poor’s affirmed its A-plus rating and a stable outlook.

Fitch recently downgraded its rating to A from A-plus with a stable outlook after the county increased the size of its capital plan to $4.2 billion for 2010-2015, up from its $2.9 billion forecast a year ago for 2009-2014.

The plan was upsized to accommodate several new local, state, and federal project requirements imposed on Florida’s largest county, most of which are regulatory in nature and related to the wastewater system. The considerable amount of long-term debt issued to finance the projects played a role in Fitch’s downgrade, but leverage ratios should remain in line with the current A category, according to the report.

New York State will appear in the competitive market on Thursday with $448.22 million of GOs structured as tax-exempt debt, traditional taxable debt, and BABs.

In a weekly report, George Friedlander, muni strategist at Morgan Stanley Smith Barney, wrote: “The yield curve in the muni market steepened modestly” last week, “with long-term yields up modestly while the intermediate sector held firm.”

“With Treasury yields edging somewhat higher, high-grade muni yields as a percentage of Treasury yields continued to drop,” he wrote.

“This is particularly the case in the shorter intermediate range, where high-grade yields appear to be unsustainably low and unattractive. Five-year triple-A munis as a percentage of Treasury yields, for example, are currently at 61.7% — break-even versus Treasuries for investors in the 38.3% marginal federal tax bracket.”

“In our view, this is the least attractive point on the muni curve,” Friedlander wrote. “While ratios on longer maturities are by no means high by historical standards, this is consistent with our thesis for the past several months: supply-demand conditions are likely to push muni yields as a percentage of Treasury yields very close to all-time historical lows, all along the yield curve.”

In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote: “With the [Federal Reserve] beginning what will likely be a slow road back to more normal intervention in the economy, Treasuries took a beating last week and municipal bonds saw sympathetic, if modest, losses across the yield curve.”

“Still, this meant strong outperformance by tax-exempt paper that, with tax rates likely to go up and BAB-related scarcity likely to worsen or at least persist, may be setting the stage for record richness in tax-exempts over the next year,” he wrote.

“If the Fed’s actions continue to cheapen up earlier Treasury maturities, municipals could also see at least a modest wave of advance refunding supply — giving accounts yet another reason to bid for higher-coupon, higher-rated paper.”

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