The tax-exempt market remained firm yesterday even as Treasuries weakened on the front end of the curve.
A $2 billion retail pricing of power supply refunding bonds from the California Department of Water Resources helped shape demand for the day and was expected to set the tone for the week.
When the specifics of the deal were announced last week, the retail period was set for two days. The change to one day likely reflected expectations for strong demand, and those expectations were proved as $966 million was sold by 3 p.m. Eastern Daylight Time. Retail orders were being accepted until 8 p.m., and the official pricing for institutions begins today.
“It’s the focus of the market,” a trader in Santa Monica, Calif., said. “Nearly half of it sold — that’s a good indication that there’s a lot of money to be spent on Cal. Especially for high-grade credits like this, there’s a lot of customer demand. So the market should be firming up after this.”
A trader in New York added: “I think by the end of today the demand component of municipals will be well-documented and the market will be firm tomorrow.”
The DWR deal featured bifurcated maturities from 2011 through 2022. Yields ranged from 0.94% in the short end to 3.80% in 2022.
Book-runners Morgan Stanley, De La Rosa & Co., and JPMorgan are leading 25 selling group members on the deal, which carries ratings of Aa3 from Moody’s Investors Service and AA-minus from Standard & Poor’s and Fitch Ratings. Those ratings are higher than the state’s general obligation debt, since they are secured by surcharges imposed on customers of the state’s three major investor-owned utilities.
The tax-exempt deal will refund and restructure part of the debt portfolio resulting from the DWR’s landmark $11.3 billion issuance in 2002 to help address the financial stress created by the California energy crisis.
Proceeds will be used to redeem outstanding variable-rate bonds, advance refund outstanding fixed-rate bonds, and pay associated swap termination payments, the preliminary official statement said.
Putting the California deal aside, one New York trader said the very long end of the tax-exempt curve was slightly weaker by a basis point, but on the whole the market was firm, which was a relief given the recent run-up in yields.
“It’s incremental almost everyday,” he added. “And it’s been going on now for more than a month. Everybody’s a bit nervous about where we’re at. Not too many people are willing to really step up and take a chance that we’re going to get better.”
While munis remained mostly flat, the Treasury market showed losses on the front end of the curve. The benchmark 10-year yield ended one basis point up at 3.70% after opening at 3.69%, while the yield on the two-year note moved up two basis points to 1.01% from its opening price of 0.99%.
By contrast, appetite for the 30-year bond strengthened in the late afternoon and pushed the yield down two basis points to 4.53%.
The Municipal Market Data triple-A scale yielded 2.96% in 10 years and 3.78% in 20 years yesterday, versus levels of 2.94% and 3.78% on Friday. The scale yielded 4.05% in 30 years yesterday, unchanged from Friday.
Friday’s triple-A muni scale in 10 years was at 80.1% of comparable Treasuries and 30-year munis were at 89.4%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 94.4% of the comparable London Interbank Offered Rate.
Aside from the California deal, new issuance yesterday included Bank of America Merrill Lynch’s retail pricing of $250 million of Massachusetts Housing Finance Agency bonds. There will be a two-day retail order period.
The bonds are rated Aa3 by Moody’s and AA-minus by Standard & Poor’s and Fitch. Bonds mature from 2010 to 2022, with yields ranging from 1.25% in 2011 to 4.375% to 2022. Sealed bids were submitted for the 2010 and 2011 maturities.
In other issuance, First Southwest led a team of five underwriters to price $115.1 million of debt for Travis County, Tex.
The majority of the bonds, rated triple-A by Standard & Poor’s and Moody’s, are limited tax certificates of obligation maturing through 2030. Yields range from 0.84% in 2011 to 4.09% in 2030.
Elsewhere in the market, Ambac Financial Group Inc. announced that its average stock price maintained a value of more than $1.00 per share for the last 30 days, placing the troubled insurer back into compliance with the New York Stock Exchange’s listing standards. In early December, Ambac faced a possible de-listing after its stock fell to below $1.00 for 30 consecutive days.
Fresh economic data had little impact on the muni market but was valuable in gauging the broader economy.
The Institute for Supply Management’s index measuring the nation’s manufacturing sector expanded for the ninth consecutive month, to a level of 60.4 — the highest since June 2004.
“The gain in new orders augurs well for May manufacturing and the V-shaped manufacturing recovery looks likely to continue,” analysts from RDQ Economics said.
Also, the Bureau of Economic Analysis indicated that personal income grew 0.3% in March and personal spending grew 0.6%. Both numbers were in line with expectations.
