Munis Unchanged as Tone Firms Up a Bit

The municipal market was unchanged with a slightly firmer tone Monday amid light to moderate secondary trading activity.

“We’re maybe a touch firmer out long, but we’re flat for the most part,” a trader in New York said. “The secondary is fairly light right now.”

The Municipal Market Data triple-A, 10-year scale fell one basis point Monday to 3.33%, the 20-year was unchanged at 4.57%, and the scale for 30-year bonds held at 4.90%.

“Thin secondary supply and very modest primary scheduling still told the Street that the path to least resistance is to lower yields,” Randy Smolik wrote in the daily MMD commentary. “But rather than showing their hand today, dealers seemed to want to hold back and wait for tomorrow’s broad array of competitive deals to be priced before giving the market a significant push.”

Monday’s triple-A muni scale in 10 years was at 92.0% of comparable Treasuries and 30-year munis were at 104.9% according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 110.4% of the comparable London Interbank Offered Rate.

Treasuries mostly showed gains Monday. The benchmark 10-year note was quoted near the end of the session at 3.62% after opening at 3.69%. The 30-year bond was quoted near the end of the session at 4.67% after opening at 4.75%. The two-year note was quoted near the end of the session at 0.85% after opening at 0.83%.

“The municipal bond market performed pretty much in line with Treasuries as rates rose earlier in the week, but then rallied modestly as Treasuries continued to fade,” George Friedlander, municipal strategist at Citi, wrote in a research note. “The muni market is still struggling to find its levels in the face of abnormally light supply, which could continue through March.”

“We continue to be concerned that, as supply finally rebounds, sectors that have not attracted demand from crossover buyers will have to widen out versus sectors that have crossover demand,” he wrote. “We continue to find paper in the 15- to 20-year range attractive but would keep credit quality quite high for now. When issuance finally rebounds, as we expect it to in April, we anticipate that there will be more attractive offerings of medium-quality paper as the market struggles to find sufficient buyers in this quality range.”

A $3.7 billion taxable Illinois GO sale this week is the largest single deal to hit the municipal market so far this year. It will be the standout offering in an otherwise lifeless primary.

Ipreo LLC and The Bond Buyer expect volume to hit $6.1 billion, roughly $2 billion less than the typical amount but up from last week’s revised $2.715 billion, according to Thomson Reuters.

The light issuance coincides with a challenging market for issuers and investors lately.

The Illinois deal, which is slated for pricing on Thursday by Morgan Stanley, comes on the heels of a report that low short-term rates caused a 28% decline in the investment income of state and local municipalities for fiscal 2010 compared to 2009, according to initial figures from Merritt Research.

Though investment income is a small percent of municipalities’ revenue, the reduction is adding pressure at a time when most government revenue sources are already under significant stress.

Last Wednesday, members of the House Oversight and Government Reform Committee opposed federal bailouts and bankruptcy protection for financially strapped municipal governments.

The Illinois bonds, rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings, will fund or reimburse a portion of the state’s obligation to make contributions to its pension fund and pay the costs of financing, including the costs of issuance of the bonds, according to the preliminary official statement.

The bonds will mature from 2011 to 2019.

In other market activity, a pair of Pennsylvania deals are on tap — one in the transportation sector and one in the health and higher education sector.

The Allegheny County Port Authority is planning to sell $263.2 million of transportation revenue bonds in a negotiated deal scheduled to be priced by RBC Capital Markets LLC. The bonds are rated A-plus by Standard & Poor’s and AA-minus by Fitch.

A $150 million sale of revenue bonds from the Pennsylvania Health and Higher Educational Facilities Authority is also planned for sale this week by Bank of America Merrill Lynch.

The bonds are rated Aa3 by Moody’s and AA-minus by Standard & Poor’s.

Two Washington issuers are also gearing up for a trip to market. The larger of the pair is a $200 million GO sale from Bellevue School District No. 405 expected to price on Tuesday.

The bonds, which are rated Aaa by Moody’s, are structured to mature from 2012 to 2030.

Also, Citi will price $170 million of Washington Health Care Facilities Authority bonds on behalf of Swedish Health Services. The credit is rated A2 by Moody’s and A-plus by Standard & Poor’s.

In the new-issue market Monday, Citi priced for retail investors $136.6 million of state revolving funds revenue bonds for the New York State Environmental Facilities Corp.

The bonds mature from 2011 through 2022, with yields ranging from 0.85% with a 2% coupon in 2013 to 3.71% with a 5% coupon in 2022. Bonds maturing in 2011 and 2012 were decided via sealed bid.

The bonds, which are not callable, are rated triple-A by all three major ratings agencies.

Trades reported by the Municipal Securities Rulemaking Board Monday showed little movement. A dealer bought from a customer taxable California Build America Bond 7.625s of 2040 at 7.06%, even with where they were sold Friday. Bonds from an interdealer trade of insured Puerto Rico 5.25s of 2024 yielded 5.51%, even with where they traded Friday.

Bonds from an interdealer trade of Harris County, Texas, 5s of 2033 yielded 5.17%, even with where they were sold Friday. A dealer sold to a customer taxable Illinois 5.1s of 2033 at 7.58%, even with where they were sold Friday.

Bonds from an interdealer trade of San Diego Water Authority 5s of 2024 yielded 4.42%, even with where they traded Friday. Bonds from an interdealer trade of Virginia College Building Authority 5s of 2029 yielded 4.68%, even with where they traded Friday.

The economic calendar was light ­Monday.

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