The municipal market was unchanged with a slightly weaker tone yesterday amid fairly light secondary trading activity.
“The market is very quiet. It is kind of just flat,” a trader in New York said. “But there are a couple of deals that will be priced this week in the primary market, and that seems to be the focus. There is some retail, but it is kind of sparse. We think retail is going to be okay, due to the fact that there are a lot of bonds coming due. The focus is on the primary market for now.”
“There’s a couple of people sticking their head up, but not a lot going on,” a trader in Los Angeles said. “We hope to get a direction with new deals that are coming on Wednesday.”
“Stock markets are up, it has taken limelight away from municipals,” a second trader in New York added. “But there is plenty of money out there that could be put to work. Inquiries are coming at levels that are a little bit cheaper than what they are right now. And July 1, there is a lot of money coming in.”
The Treasury market showed losses yesterday. The benchmark 10-year note was quoted near the end of the session at 3.25% after opening at 3.22%. The 30-year bond was quoted near the end of the session at 4.17% after opening at 4.15%. The two-year note was quoted near the end of the session at 0.72% after opening at 0.71%.
The Municipal Market Data triple-A scale yielded 2.97% in 10 years and 3.78% in 20 years yesterday, matching levels of 2.97% and 3.78% Friday. The scale yielded 4.08% in 30 years yesterday, matching Friday’s level.
Friday’s triple-A muni scale in 10 years was at 92.2% of comparable Treasuries and 30-year munis were at 98.3%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 103.3% of the comparable London Interbank Offered Rate.
A $1.75 billion sale from California’s Bay Area Toll Authority will join a $1.4 billion offering of subordinate sales-tax revenue bonds from the Puerto Rico Sales Tax Financing Corp. to dominate the primary activity this week as the market prepares for an estimated $8.21 billion in new long-term volume, according to Ipreo LLC and The Bond Buyer.
Investors managed to digest most of a calendar last week that included the pricing of a revised $5.31 billion, according to Thomson Reuters, down slightly from the original estimate of $5.71 billion.
This week’s BATA deal in California is structured as taxable Build America Bonds and is slated for pricing on Thursday by Bank of America Merrill Lynch after a tentative retail order period planned for tomorrow.
The revenue bonds are expected to be rated A1 by Moody’s Investors Service and A-plus by Standard & Poor’s. The proceeds will be used to finance the authority’s capital projects.
Led by Citi, the Puerto Rico deal is planned for pricing today and consists of current interest serial bonds maturing from 2036 to 2042, capital appreciation bonds from 2035 to 2040, and convertible bonds in 2035.
The Puerto Rico bonds, known by the Spanish acronym for the issuer, COFINA, are subordinate in payment to the senior bonds and parity obligations of the corporation, according to the preliminary official statement.
They are expected to be rated A1 by Moody’s and A-plus by Standard & Poor’s and Fitch Ratings.
Elsewhere, issuers are planning large deals, such as the $516.2 million issuance of taxable BABs by the University of Texas System Board of Regents.
The bonds, which are secured by pledged revenues, will be negotiated by Morgan Stanley today or tomorrow and are expected to be rated triple-A by all three major rating agencies.
The Northeast is also expecting two sizable deals, the largest of which is $400 million of second-resolution water and sewer system revenue debt planned for today from the New York City Municipal Water Finance Authority.
The deal, which will be priced by senior book-running manager Morgan Keegan & Co., consists of taxable BABs structured as one maturity in 2042 that will have bifurcated coupons.
The authority’s second-resolution bonds are rated Aa2 by Moody’s, AAA by Standard & Poor’s, and AA-plus by Fitch.
Barclays Capital, Jefferies & Co., M.R. Beal & Co., and Ramirez & Co. are co-senior managers.
In a weekly report, John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney, wrote that “despite the steady diet of negative press regarding many municipal issuers and, by extension, their outstanding bonds, we do not view this market correction as primarily credit related — though such articles, in aggregate, likely do have some impact.”
“This appears to be the third sell-off (October, April, and June) during the last year that seemed to be driven largely by market exhaustion, having reached absolute yield levels that were viewed as uninspiring to many prospective buyers,” Dillon wrote. “Evidencing this lack of buyer conviction/support is the absence of significant selling pressure. The prior two selloffs (October ’09 and April ’10) produced pricing that enabled gradual market recovery.”
“Market weakness since June 3 has been considerable despite what would otherwise be viewed as market favorable technicals,” Dillon wrote. “These factors include percentage of comparable maturity U.S. Treasuries, seasonally heavy redemptions from maturing bonds and coupon payments in June and July, lowered new-issue tax-exempt supply due to Build America Bonds encroachment, and the presence of compelling spreads for A-rated bonds.”
Also, in a weekly report, Alan Schankel, managing director at Janney Capital Markets, was quoted as saying that “municipal market activity has been quiet as absolute yields remain low, although retail investors continue to add money as evidenced by continued positive flow of money to tax free mutual funds.”
“Quarterly Federal Reserve statistics show that household ownership of municipal bonds at the end of the first quarter exceeded $1 trillion, the highest level ever, equal to about 36% of outstanding issuance,” he added. “If mutual funds are added the total exceeds 50% of the $2.8 trillion outstanding.”
The economic calendar was light yesterday.
Priti Patnaik contributed to this column.
