Munis Flat as Week Starts Off Quietly

The municipal market was flat to slightly firmer yesterday amid somewhat light secondary trading activity.

“There’s a little bit of firmness out there, but not a whole lot,” a trader in New York said. “I think it’s more a carry-over from last week. We’re maybe better a basis point or two in spots, but overall, we’re somewhat flat. It’s a fairly quiet start to the week, with not a ton trading.”

“It’s very quiet. There’s not a whole lot going on,” a second New York trader said. “There’s a few trades on the front end. Most of the trades I got done today, though, are just because I wanted to move something.”

The Treasury market showed some losses yesterday. The benchmark 10-year note was quoted near the end of the session with a yield of 3.81% after opening at 3.76%. The yield on the two-year finished at 0.99% after opening at 0.96%.

The yield on the 30-year bond was quoted near the end of the session at 4.70% after opening at 4.67%.

The Municipal Market Data triple-A scale yielded 3.02% in 10 years and 3.84% in 20 years yesterday, compared with Friday’s levels of 3.03% and 3.85%. The scale yielded 4.15% in 30 years yesterday, matching Friday.

Friday’s triple-A muni scale in 10 years was at 80.4% of comparable Treasuries and 30-year munis were at 88.9%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 93.3% of the comparable London Interbank Offered Rate.

Two large state GO deals consisting of taxable Build America Bonds are headed to the market this week amid an estimated $5.58 billion in total new volume, according to Ipreo LLC and The Bond Buyer.

The offerings come on the heels of a revised $6.13 billion of volume that was priced last week, according to Thomson Reuters.

A $700 million GO sale from Illinois will be priced by William Blair & Co. today. It features an all-BAB structure that includes serial bonds maturing from 2011 to 2025 and a term bond in 2035.

Proceeds from the sale will be used to provide grants to school districts for construction and repair of public school facilities.

The BABs are rated Aa3 by Moody’s Investors Service with a negative outlook, in a rating that was recalibrated upwards Monday. They are rated A-plus with a negative watch by both Standard & Poor’s Fitch Ratings.

Connecticut, meanwhile, is planning to issue $642.3 million of GO debt in a negotiated deal being senior-managed and priced by M.R. Beal & Co.

The three-pronged sale includes $353 million of GO bond anticipation notes maturing May 19, 2011; $184.2 million of direct-pay BABs maturing 2019 to 2026; and $105 million of tax-exempt GO bonds maturing serially from 2015 to 2018.

The retail order period, which began Friday, continued yesterday. Bonds from the $105 million tax-exempt series yield from 1.93% with a 2.5% coupon in 2015 to 2.86% with a 5% coupon, according to yesterday’s retail scale. Further retail pricing information was not available by press time.

The notes are rated MIG-1 by Moody’s, SP-1-plus by Standard & Poor’s, and F1-plus by Fitch. The GOs are rated Aa2 by Moody’s following Monday’s rating recalibrations by the agency, AA by Standard & Poor’s, and AA-plus by Fitch.

The Los Angeles Unified School District, the largest school system in California and the second-largest in the U.S.,  is gearing up to sell approximately $450 million of GO bonds on Thursday. Goldman, Sachs & Co. will lead manage the pricing of $290.1 million of taxable, direct-pay qualified school construction bonds.

Rated Aa2 by Moody’s and AA-minus by Standard & Poor’s, the QSCBs are backed by ad valorem property taxes and will mature in 2027.

In a weekly report, George Friedlander, managing director with Morgan Stanley Smith Barney, wrote that last week, “the tax-exempt bond market generally firmed, with tax-exempt supply continuing to be relatively modest for the third straight week,” but that “yields have come down only very slightly on triple-A paper, and have actually increased on one-year issues.”

“However, credit spreads have come in a bit even on double-A issues versus the triple-A curve, and some of the strongest moves were reserved for lower-rated, longer maturity paper,” he wrote. “That paper, when you could find it, was trading as much as 10 to 15 basis points lower in yield than a week earlier. There is a certain irony in this pattern, given the widespread coverage of state and local budgetary pressures in recent weeks. “

“There is also a certain logic to it,” Friedlander wrote. “Much of the longer-maturity, lower-rated paper that remains active in the tax-exempt market is in sectors whose credit strength for the next several years is not closely tied to the budgetary pressures facing state and local governments. These sectors include nonprofit hospitals, housing, and tobacco settlement bonds.”

“In addition, the tightening of spreads on this type of paper is consistent with what has been going on in many sectors of the taxable bond market, where credit spreads continue to tighten,” he wrote.

“Furthermore, the Build America Bond market continues to attract additional new investors, including many from Europe in particular, and spreads on BABs over Treasury yields continue to tighten. This pattern supports the tax-exempt market by pushing a larger proportion of issuance over to that sector.”

In economic data released yesterday, the composite index of leading economic indicators gained 1.4% in March, its 12th straight gain.

LEI increased a revised 0.4% in February, originally reported as a 0.1% rise. Economists polled by Thomson Reuters predicted LEI would be up 1.0% in the month.

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