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Despite Fall in Rates, Slim Pickings Ahead

AUG 5, 2011 8:56pm ET
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If not now, when?

Even with municipal bond yields across the curve dropping to 2011 lows last week, borrowers are still not jumping at the opportunity to come to market.

Currently, just $2.25 billion of new issuance is expected this week — down from last week’s revised $3.24 billion and less than half of the $4.7 billion weekly average for 2011. But sources said more borrowers could rush deals to market this week to take advantage of extremely low yields.

Last Wednesday, muni yields saw one of the sharpest one-day declines in recent history, wrote Alan Schankel, head of fixed-income research at Janney Capital Markets. On Thursday, the five-year triple-A benchmark hit an all-time low of 1.00% and the 30-year slipped to 3.95%.

Schankel noted that last week’s triple-A Montgomery County, Md., sold in the competitive market and “despite being on [Moody’s Investors Service’s] downgrade watch, yields came in right in line with AAA benchmarks.”

This week, the negotiated market will see $1.75 billion of new issuance, down only slightly from last week’s revised $1.85 billion. The competitive calendar will see $498 million, down from last week’s $1.4 billion.

While this week’s projected issuance is light, “we might get surprised and the market could see some deals added to the ­calendar to take advantage of the rundown in rates,” said Evan Rourke, portfolio manager at Eaton Vance. “So we could see things creep up when they weren’t initially on the calendar.”

That said, August is historically a time where underwriters and issuers are on vacation, he noted. The biggest deals will come in the negotiated market, with the Los Angeles Department of Water and Power leading the way with a $300 million issue.

Underwritten by Citi, the bonds mature serially from 2012 to 2031, with term maturities in 2036 and 2041 term bonds. The bonds are set to price Wednesday for retail and Thursday for institutional buyers and are rated Aa2 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch Ratings.

The Puerto Rico Public Buildings Authority will issue $225 million of government facilities revenue bonds, which will be priced for retail on Tuesday and institutional on Wednesday by Ramirez & Co.

The Private Colleges and Universities Authority of Georgia will issue $218.8 million of Series 2011A revenue bonds for Emory University on Thursday. The term bonds mature in 2016 and 2041 and are underwritten by Barclays Capital. They are rated double-A. The biggest deal in the competitive market will come Tuesday, a $100 million issue by the West Haymarket Joint Public Agency in Lincoln, Neb. The bonds are rated Aa1 by Moody’s.

Regarding what types of deals are being priced well, Rourke said all types are seeing success. “In some cases, you have a rising tide lifting all boats,” he said. “A fairly dramatic move in interest rates helped everything go well. Funds are available in the market and there are buyers out there. Anything that came in the past week was aided by a favorable tide.”

While the relative value of munis is very attractive now all along the curve, Rourke noted that things could slow in the next few weeks as buyers look at the absolute low level of yields.

Brian Lehky, portfolio manager at Dana Investment Advisors, said his firm does most of its buying in the secondary because “from our perspective, the new-issue market is a little expensive.” The secondary offers more spread and allows the firm to be opportunistic in various sectors, capturing inefficiencies that present themselves from day to day, he said.

“We’ve found value in the four- to seven-year maturity range, which is a little longer than our usual three-year duration target,” Lehky said. “It’s a little longer than we’d like to be right now, given interest rate uncertainties, but we are being compensated for taking on slightly longer durations.”

“With a recent spike in new issuance, and the volatility in Treasury rates, I have a feeling that some financial advisers might table some new issues and allow the market to stabilize prior to bringing additional bonds to market,” he said.

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