Thursday's Market

Upsized MEAG Deal Gives Munis a Charge

The muni market got a jolt Thursday when Morgan Stanley boosted the size of its Municipal Electric Authority of Georgia offering during institutional pricing.

The taxable deal nearly doubled to $338.1 million from the original $172.8 million offered to retail investors Tuesday.

The upsizing showed that the deal was very well received, a trader in New York said. The move further underscored a market hungry for supply to provide liquidity and direction for yields.

“It increased in size a lot,” he said, “because they could get away with it.”

The MEAG deal was broken into two sets of three series: Project One subordinated bonds Series 2011 A, B, and C, and general resolution project-subordinated bonds Series 2011 A, B, and C.

For the Project One bonds, the $245.4 million Series A has yields ranging from 1.28% in 2013 to 4.07% in 2021. Series B, for $30.53 million, has yields ranging from 1.71% in 2014 to 4.07% in 2021. Taxable Series C, for $965,000, has a yield of 1.75% in 2013.

For the general resolution project debt, the $5.96 million Series A has yields ranging from 1.78% in 2014 to 4.07% in 2021. Series B, worth $54.2 million, has yields ranging from 1.71% in 2014 to 4.07% in 2021. Series C, worth $1.78 million, has yields of 1.75% in 2013 and 2.10% in 2014.

The bonds are rated A2 by Moody’s Investors Service, A by Standard & Poor’s, and A-plus by Fitch Ratings.

Traders also reported strong activity in the primary and secondary municipal markets throughout the day as yields firmed for a 12th consecutive day. This was particularly true for the belly of the curve.

“It was a pretty good market overall,” the New York trader said. “There’s a strong undertone. You had bonds that moved away. You had a more active secondary market.”

Muni yields reached their lows for the year, the Municipal Market Data’s triple-A scale showed.

Short-term yields firmed one to two basis points. Intermediate yields fell three to five basis points. Long-term maturities dropped one to two basis points.

The benchmark 10-year muni yield slipped five basis points to 2.86% Thursday. It has fallen 41 basis points since April 11, when the 10-year yield was 3.27%. The benchmark yield reached its lowest point since Dec. 6, when it registered 2.81%, and has tumbled 14 basis points in a week.

The two-year muni yields firmed one basis point on Wednesday to 0.57%, a drop of three basis points since last Thursday. The 30-year yield also fell one basis point to 4.60%, or 10 basis points since last Thursday.

Treasury yields also firmed across the curve. The two-year yield fell two basis points on the day to 0.63%. The 10-year yield slid five basis points to 3.31% and the 30-year yield settled five basis points lower at 4.41%.

Predictions for total issuance in 2011 have plunged to between $200 billion and $300 billion, roughly one-quarter to one-half of earlier estimates. Volume is expected to reach $3.05 billion this week, according to The Bond Buyer and Ipreo LLC. Last week, just $2.06 billion came to market. Issuance averaged $3 billion in the first quarter, well under the $8 billion floated weekly in 2010.

Some volume reached the markets this week, and has met a hungry audience. Still, more needs to arrive, according to traders. But supply isn’t expected to pick up until later in the summer, another trader in New York said.

“We probably won’t see anything until the middle to the end of summer, if issuance picks up,” he said. “We’ll have a decent fourth quarter, with some issuance on the beginning part. But we won’t see anything in December, because you barely have any issuance then.”

Record outflows from municipal bond funds continue. Though they have slowed in the past few weeks, at least one source says redemptions from muni bonds may start to pick up as the 2012 tax season approaches.

“There have been elevated outflows over the past few weeks as people are paying taxes,” said Christopher Ryon, managing director at Thornburg Investment Management. “People are pulling money out of bond funds. But we should see redemption levels return to normal in May.”

Redemptions were slowing before tax season began, Ryon said, and most likely redemptions will start to slow again after tax season. “As credit risk fears subside,” he said, “we should see increased inflows as well.”

Ryon added that while the industry on average has seen 9% outflows, Thornburg has only seen redemptions of about 1%.

Municipal finance pros expect state and local municipal debt default levels to be less or remain unchanged in 2011, according to a survey conducted by RBC Capital Markets at The Bond Buyer’s 2011 NY/Tri-State Area Public Finance Conference, held two weeks ago.

The RBC survey — involving 92 federal, state, and local officials, bankers, and other municipal finance professionals who attended the conference — found that 60% say there will be either the same number or fewer defaults this year than in 2010.

Conference attendees surveyed also were fairly optimistic that state and local government revenues would return to pre-crisis levels in the near term.

In fact, 51% expected revenues to normalize in the next two to three years. Furthermore, 63% of respondents said state and local government officials are taking the steps necessary to address their budget issues.

The Bond Buyer 20-bond index of 20-year general obligation yields declined 12 basis points this week to 4.86%, a six-week low.

The 11-bond index of higher-grade 20-year GO yields dropped 13 basis points this week to 4.59%, a 21-week low dating back to Dec. 2.

The revenue bond index, which measures 30-year revenue bond yields, fell three basis points this week to 5.51%, a six-week low.

The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, rose three basis points this week to 0.50%, a four-week high.

The weekly average yield to maturity on The Bond Buyer’s 40-bond municipal bond index, which is based on 40 long-term municipal bond prices, declined seven basis points this week to 5.58%, which is the lowest weekly average for the yield to maturity since the week ended Jan. 6, when it was 5.54%.

In other news, U.S. charter school debt has grown steadily over the past several years and should continue to as both enrollment and the number of schools grows, Standard & Poor’s reported Thursday.

As of April 10, Standard & Poor’s rated about $1.8 billion of unenhanced debt issued by 123 charter schools. The figure does not include charter school debt rated only under Colorado’s moral obligation program. This has increased from $590.7 million by 43 schools in March 2006, and $385 million by 25 schools in November 2004.

Standard & Poor’s rates charter school debt in 18 states, plus the District of Columbia.

Taylor Riggs contributed to this column.


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