N.Y. Liberty Development Corp. Leads Much Smaller Calendar

The flood of new supply that has inundated the municipal bond market the past month will die out this week as issuers take a breather from selling new debt.

State and local governments are slated to sell just $709.3 million this week, according to data from The Bond Buyer and Ipreo, and could see as much $2 billion. The lull in the storm is a welcome reprieve for a market that absorbed a tidal wave of $11.16 billion last week. Eight billion is typical.

Heavy supply has been one of the primary factors cited in the thrashing of municipal bonds the past two months, during which the yield on the benchmark triple-A rated 10-year municipal bond has spiked nearly 90 basis points.

According to Bloomberg LP, the market has digested $54.1 billion in new supply the past five weeks, and $107 billion the past 10. So, the Street is grateful for the let-up in supply.

“It’s time for the supply vacation,” said Fred Yosca, manager of underwriting and trading at BNY Capital Markets.

Yosca is not worried about the market’s ability to absorb the paper that is coming and does not foresee much disruption for bond sales in the secondary market.

The higher yields have attracted buyers back into the market, he said, and the bid side is decidedly stronger.

“Higher yields have stimulated demand and there is a bid,” Yosca said.

The biggest deal of the coming week by far is a $1.31 billion negotiated offering from the New York Liberty Development Corp., underwritten by Goldman, Sachs & Co.

Because the sale date has not been established yet, it is not included in the estimate for total weekly issuance.

The money will be lent to Larry Silverstein to partially finance the construction of 3 World Trade Center, a planned 62-story office building with 2.1 million square feet of office space at the World Trade Center site in New York City. The loan will be repaid with money collected from renting out the office space.

Repayment of the debt is guaranteed by the Port Authority of New York and New Jersey, which owns the land the building is being constructed on. The bonds are rated AA-minus by Standard & Poor’s, mainly reflecting the Port Authority backing.

Also in the negotiated market, the Utah State Board of Regents is floating a $389.5 million student loan revenue deal underwritten by RBC Capital Markets. The issuer expects the bonds to be rated triple-A by Standard & Poor’s and Moody’s Investors Service.

Paltry new-issue supply notwithstanding, John Dillon, municipal bond strategist at Morgan Stanley Smith Barney, foresees some potential for a market where sellers are a lot more motivated than buyers.

The normal providers of capital and liquidity are likely to be quiet the next two weeks.

Many traders and institutional buyers are typically wary of placing big bets so late in the year, Dillon said, for fear of blemishing profit-and-loss statements or their place in the rankings tables.

Meanwhile, any number of potential sellers might try to dump bonds into a market where traders are playing it safe: mutual funds facing redemptions, money managers trying to save whatever gains they can on their holdings, underwriters trying to move any pieces of deals they’re still stuck with, or dealers trying to clear inventory to avoid further losses.

This is often the dynamic toward the end of the year, Dillon said, but given how excitable the market has been lately, it could be worse this time.

“The exaggerated volatility exhibited by the current municipal market only magnifies this annual dynamic,” he said. “There seems little else beyond the natural wind-down of the muni market next week to reverse the recent price declines.”

The market seems to have calmed down a little the past few days.

After spiraling up 35 basis points this month, the yield on the Municipal Market Advisors triple-A rated 30-year scale has since fallen back seven basis points to 4.88%.

The benchmark Municipal Market Data triple-A 10-year yield slipped nine basis points from Wednesday to Friday, and the 30-over-five-year yield curve flattened 17 basis points in just two days.

“The pendulum has swung the other way as bonds are making significant strides to consolidate this week’s losses,” Thomson Reuters analyst Randy Smolik wrote in his daily commentary on Friday. “After hitting the highest yields for the year, the drop in primary supply into year-end gives the market some breathing room.”

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