Munis Hold Firm as Large Deals Loom

The municipal market has picked a bearing for the past couple of days and is holding firm. It has taken the measure of choppy Treasuries on Monday and the week’s particularly large competitive deals and has decided to maintain its course until the latter arrive.

“The market is showing remarkable stability,” a trader in New York said. “We’re a market that is standing pat.”

As a case in point, tax-exempt yields held steady across the curve Monday for the third straight session, according to the Municipal Market Data triple-A scale.

The 10-year benchmark yield stood at 2.63% for the third day in a row, the MMD scale showed. Likewise, the 30-year yield remained at 4.23% for another day, its low since Nov. 12.

The two-year yield stayed at 0.42% for the sixth consecutive day, its lowest level since Sept. 7, according to MMD numbers. Before that, it had hovered at 0.44% for 17 straight trading sessions.

Into the afternoon, muni bids were holding up in the secondary market against low nominal yields as the week’s issuance slowly arrived.

Though retail investor interest has been constrained by the low yields, sellers still saw strong bids, a trader in New Jersey said.

Treasuries were volatile throughout the day. Yields dropped in early trading across the curve, only to rise as the session stretched into the afternoon.

Fittingly, Treasury yields closed the day mixed. The 10-year yield jumped three basis points from last week’s close to 2.96%. The two-year yield fell one basis point to 0.38%. The 30-year yield held at 4.20%.

With the equities markets rallying for most of the day, Treasuries showed modest losses, according to MMD analyst Randy Smolik.

And without strong leadership from the taxable sector, he added, it was easy for most muni participants to sit tight and wait for this week’s deals to come to market starting Tuesday.

Investors anticipate roughly $5 billion of new issuance this week. That would make it the third week in a row in which volume has at least reached the $5 billion level.

Last week, the market saw a revised $5.11 billion, following a revised $7.8 billion the week before. The year has seen weekly averages of about $3 billion.

The largest deals for the week come from the competitive calendar. Leading the charge, the municipal market is looking at a series of competitive deals from Georgia that traders expect will set the tone for pricings for the week.

The deals, comprising just under $1 billion of triple-A rated general obligation bonds Tuesday, could bring in some of the large buyers who have been sitting on the sidelines with money from June redemptions, industry pros say.

Yet for all of its apparent influence, the Georgia issue can mislead, the New York trader said. Historically, similar Georgia debt has been overpriced, on occasion, relative to other bond issues of its type, he added.

“But Georgia is the deal everyone will focus on tomorrow morning,” the trader said. “If priced to move, it’ll be good for the market.”

Leading off Monday in negotiated sales, Siebert Brandford Shank & Co. priced for retail $260 million of Dormitory Authority of the State of New York lease revenue bonds. They are rated Aa2 by Moody’s Investors Service and AA-minus by Fitch Ratings.

Yields range from 0.67% in 2013 to 3.18% in 2021, and 4.25% for maturities in 2029. Bonds maturing in 2012 are offered through a sealed bid.

The debt offers coupons for bonds maturing from 2013 through 2021 that range from 2% through 5%. Bonds maturing in 2029 offer a coupon of 4.25%.

Morgan Stanley priced for retail $141 million of Tri-County Metropolitan Transportation District of Oregon capital-grant receipt revenue tax-exempt and taxable bonds. The debt for both issues is rated A1 by Moody’s and A by Standard & Poor’s.

The $134.2 million tax-exempt series offers coupons for bonds maturing from 2016 through 2027 that range from 2.5% through 5%. Yields for the series range from 1.85% in 2016 to 4.32% in 2027.

The $6.4 million series of taxable debt that matures in 2016 is priced at par, with a yield and coupon offered at 3.08% in 2016.

Morgan Keegan priced $111 million of Dallas and Fort Worth joint revenue refunding bonds for Dallas-Fort Worth International Airport.

The bonds are rated A1 by Moody’s and A-plus by both Standard & Poor’s and Fitch. All maturities are offered in a sealed bid.

The pricing has gone well for the DASNY issue, according to Sherman Swanson, managing director in underwriting at Siebert Brandford.

The first 10-years Siebert Brandford opened saw good flow, he added. They closed a number of maturities.

“We opened up some more bonds in the 11- to 15-year range for retail,” Swanson said. “And we got some more follow-through on those, too.”

As far as performance goes, munis have been tops among its kin for the first half of June, according to research assembled by Bank of America Merrill Lynch. They have outperformed both Treasuries and corporates, wrote John Hallacy, municipal research strategist with the bank.

Munis have returned 0.532% during the first two weeks of the month. That compares to 0.456% for U.S. Treasuries and 0.044% for corporates.

Checking the scorecard a little more closely reveals that some in the muni lineup are hitting better than others this month, Hallacy’s team wrote in its most recent muni commentary.

The long end — bonds maturing past 22 years — was the best performing part of the curve, returning 0.952% in June.

When analyzing returns by municipal ratings in June, triple-B rated debt had the best total return, at 1.087%.

“We think the outperformance of BBB-rated munis and long-term munis for the month can be partly attributable to a desire on the part of investors to reach out to the BBB sector and long-term bonds for yield,” Hallacy wrote.

And for 2011, year-to-date, the belly of the curve — credit maturing from 12 to 22 years — performed the best. For their part, Build America Bonds have now returned 10.4% for the year, a yield Hallacy ascribes to their scarcity and longer average maturities.

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