Headline Risk Returns to Haunt Munis

Headline risk returned to the municipal market Wednesday, driving yields higher by as much as 10 basis points as the New York City Transitional Finance Authority brought the largest loan of the new year to the institutional market.

Traders said tax-exempt yields were higher by about five basis points inside of 10 years and as much as eight to 10 basis points on the longer end of the scale, softening for the third consecutive session.

“We definitely weakened fairly considerably,” a trader in Los Angeles said. “Munis are getting a lot of attention in the mainstream media right now, and it’s unwanted attention. It’s not doing anybody any favors out there.”

The Municipal Market Data triple-A 10-year scale increased seven basis points Wednesday to 3.31%, the 20-year scale rose three basis points to 4.68%, and the scale for 30-year bonds climbed four basis points to 4.83%.

In the daily MMD commentary, Randy Smolik wrote that more warnings about municipal credits in the media shook market conviction, noting that a rebound in Treasuries didn’t stop munis from drifting.

“From Meredith Whitney appearing on CNBC this morning to [JPMorgan Chase & Co. chief executive officer] Jamie Dimon speaking at an annual company health-care conference last night, investors were urged caution when investing in municipals with the expectation that more bankruptcies will be declared,” Smolik wrote. “It’s hard to hold conviction until the news turns friendlier.”

James Colby, senior municipal strategist at Van Eck Global, said that retail investors have succumbed to headline risk.

“This is a crisis of credit confidence that’s occurring now that’s taking people out of the marketplace until they have a reason to believe that munis will continue to be a viable and sustainable asset class,” Colby said.

In Wednesday’s new-issue market, Barclays Capital priced $875 million of future tax-secured subordinate bonds for the New York City TFA.

The bonds mature from 2012 through 2033, with term bonds in 2035 and 2039. Yields range from 1.17% with a 2.5% coupon in 2013 to 5.33% with a 5% coupon in 2039.

The bonds are callable at par in 2020, except bonds maturing in 2028, which are callable at par in 2015. The credit is rated Aa1 by Moody’s Investors Service and AAA by Standard & Poor’s and Fitch Ratings.

Wednesday’s triple-A muni scale in 10 years was at 98.8% of comparable Treasuries and 30-year munis were at 109.1%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 116.9% of the comparable London Interbank Offered Rate.

Treasuries showed some losses Wednesday. The benchmark 10-year note ended at 3.36% after opening at 3.34%. The 30-year bond finished at 4.53% after opening at 4.49%. The two-year note closed at 0.59% after opening at 0.58%.

On Tuesday, pricing of the New Jersey Economic Development Authority’s $1.9 billion school construction bond issue, which was planned for Wednesday, was postponed until Thursday in anticipation of a major snowstorm that hit the Northeast.

Despite the postponement of the institutional order period, lead manager Bank of America Merrill Lynch priced the bonds for retail Tuesday as planned and conducted a second day of retail pricing Wednesday.

During that retail order period, bonds from the $1.2 billion series of tax-exempt refunding debt maturing from 2014 through 2024 were offered with yields ranging from 2.29% with a 3% coupon in 2014 to 5.19% with a 5% coupon in 2024. The yield on the 2024 maturity is 21 basis points higher than in Tuesday’s retail pricing. The bonds are callable at par in 2021.

A $400 million series of SIFMA index refunding notes matures in 2017 and 2018, yielding 165 and 180 basis points over the index. They are callable at par in 2016 and 2017, respectively.

The deal also contains $245 million of taxable refunding bonds. Retail pricing information on the series was not available at press time.

The credit is rated Aa3 by Moody’s and AA-minus by Standard & Poor’s and Fitch.

Elsewhere in the new-issue market Wednesday, Wisconsin competitively sold $428.7 million of general obligation bonds to JPMorgan with a true interest cost of 4.31%.

The bonds mature from 2012 through 2031, with yields ranging from 1.54% with a 5% coupon in 2014 to 5.10% with a 5% coupon in 2031. Bonds maturing in 2012 were decided via sealed bid. Bonds maturing in 2013 were not formally re-offered. The bonds, which are callable at par in 2021, are rated AA by Standard & Poor’s and Fitch.

Seattle competitively sold $297.8 million of municipal light and power improvement and refunding bonds to Citi with a TIC of 4.53%.

The bonds mature from 2011 through 2033, with a term bond in 2036. Yields range from 1.79% with a 5% coupon in 2015 to 5.40% with a 5.25% coupon in 2036. The bonds, which are callable at par in 2021, are rated Aa2 by Moody’s and AA-minus by Standard & Poor’s.

In economic data released Wednesday, import prices rose 1.1% in December as fuel costs increased.

Total export prices expanded by 0.7% last month. For the year, export prices increased 6.5% to post their largest calendar-year gain since the Labor Department started the index in 1983.

Nonfuel imports were up 0.3% and imports excluding petroleum gained 0.4%.

Economists expected import prices to increase 1.2%, according to Thomson Reuters. Import prices for November were revised upward to a 1.5% increase from the 1.3% reported last month.

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