The municipal market was mostly unchanged yesterday, with a slightly weaker tone, as participants tried to decipher the volatility associated with the European debt crisis.
“People are still pretty scared,” a trader in Los Angeles said. “No one really wants to get involved at this point. There might be a little bit of weakness, but there’s just not a lot of trading going on.”
The Treasury market weakened after European governments announced a loan package of nearly $1 trillion and the European Central Bank said it would buy bonds to stave off the crisis.
The benchmark 10-year finished yesterday at 3.55% after opening at 3.43%. The 30-year Treasury was quoted near the end of the session at 4.41% after opening at 4.28%. The two-year note yield was quoted near the end of the session at 0.88% after opening at 0.81%.
The triple-A scale yielded 2.97% in 10 years Monday, two basis points higher than Friday’s 2.95% but still much stronger than the late March level of 3.09%, according to Municipal Market Data.
The 20-year yield was 3.75%, two basis points higher than Friday, while the scale yielded 4.04% in 30 years, three basis points higher than Friday.
Friday’s triple-A muni scale in 10 years was at 86.3% of comparable Treasuries and 30-year munis were at 93.9%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 98.8% of the comparable London Interbank Offered Rate.
“People are still sort of sitting on the sidelines, waiting to see how everything shakes out,” a trader in New York said.
The primary market is expected to include a handful of large deals that run the gamut from long-term, fixed-rate, tax-exempt offerings to short-term, floating-rate, and taxable issues. They are part of an estimated $7.56 billion of new volume anticipated for pricing this week, according to Ipreo LLC and The Bond Buyer.
The deals arrive on the heels of an eventful period in the market last week.
Possible trading problems and comments at the European Central Bank’s monetary policy meeting were followed by a two basis-point gain late Thursday by municipals and a nearly 1,000 point decline, or 9.2% drop, in the Dow Jones industrial average, which closed down 347.80, or 3.20%.
Seattle will kick off the activity with the largest negotiated deal of the week when it sells $810 million of improvement and revenue refunding bonds on behalf of Washington Municipal Light and Power.
The multifaceted deal, slated for pricing Thursday by Citi, consists of taxable Build America Bonds maturing from 2017 to 2025, with term bonds in 2030 and 2040, tax-exempt bonds maturing serially from 2011 to 2026, and recovery zone bonds that mature in 2040.
The bonds are expected to be rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s.
The New Jersey Economic Development Authority will add some diversity to the negotiated market when it issues $750 million of floating-rate notes designated as taxable school construction BABs — potentially the BAB market’s largest-ever floating-rate note sale.
Rated Aa3 by Moody’s and AA-minus by Standard & Poor’s and Fitch, the securities will be priced by Bank of America Merrill Lynch tomorrow with yields based on the three-month London Interbank Offered Rate plus a spread. The current three-month Libor is 0.37%.
The state appropriation-backed securities will mature in 2013. New Jersey plans to refinance the notes into long-term debt or roll them over with additional notes at maturity.
“Last week’s extreme volatility in Treasury prices, equity prices, sovereign contagion and rescue, and employment generally swept by the municipal market,” Matt Fabian, managing director at Municipal Market Advisors, wrote in a weekly report. “By not changing much, municipals were left appearing substantially cheaper versus Treasuries, and perhaps riskier versus the for-now bailed out European sovereigns.”
The issuers poised to move forward this week include the Florida Hurricane Catastrophe Fund Financing Corp., which is readying its $692.8 million sale of revenue debt that JPMorgan will price on Thursday.
The bonds, which are structured to mature as two serial bonds in 2015 and 2016, are expected to be rated Aa3 by Moody’s and AA-minus by Standard & Poor’s. Fitch Ratings upgraded them late yesterday to AA.
They are being sold by the state-run nonprofit reinsurer ahead of the hurricane season, which begins June 1 and lasts six months.
Proceeds will be used to pay storm-related losses associated with hurricanes Dennis, Katrina, Rita, and Wilma that battered the south in 2005.
Further north, $650 million of Dulles Toll Road revenue bonds are slated to be issued by the Metropolitan Washington Airports Authority and priced by joint book-runners Morgan Stanley and Citi. The MWAA delayed its initial sale schedule due to market turbulence, but expects the debt to price this week.
“The market showed real strength moving a large and upsized California loan to retail investors with multiple yield cuts, and Build America Bond demand remains solid,” Fabian wrote.
“While challenges remain to policymakers in the near and long terms, there is so far no evidence of an imminent collapse in state and local credit nor a systemic trigger to such an event,” he wrote.
“Still, default statistics did spike last week, but this was widely expected as almost all Florida dirt deals have a payment date May 1 and many continue to lack resources to pay.”
