Muni Tone Strong as Market Shrugs Off California News

The municipal market saw another strong day of buying Wednesday, even though another city in California wallowed in a state of financial calamity.

Tax-exempt yields past the short end of the curve fell. The week’s biggest deal, $850 million of New York City Transitional Finance Authority building aid revenue bonds, held a preliminary pricing, after a second retail order period Wednesday.

That means the deal saw strong interest, a trader in New Jersey said.

“We had a pretty good tone in the muni market today,” he said. “The TFA deal saw some rather substantial bumps in parts of the loan throughout the yield curve. It basically evidenced some heavy oversubscriptions in a lot of maturities.”

Tax-exempt yields ended the day lower, starting at the belly of the curve. They were steady through eight years, according to the Municipal Market Data scale.

Yields from nine to 13 years were one to two basis points lower. Beyond 13 years, they dropped three and four basis points.

The rally in triple-A yields continued in Wednesday’s session at the intermediate and long end of the curve. The 10-year triple-A yield inched down one basis point to 1.77%.

The 30-year dropped four basis points on the day to 3.02%. The two-year held at 0.32% for the 28th straight session.

Treasury yields hovered at levels they have lingered at throughout the week. The benchmark 10-year yield ticked up one basis point to 1.52%.

The 30-year yield rose one basis point to 2.61%. The two-year held steady at 0.28%.

The New York TFA deal shows that there’s a lot of cash around in the muni market, the trader said. Coupon payments and redemptions are paving the way for investors.

“Right now, it’s an environment that’s pretty bullish for the bond market,” he said. “We’re seeing scarcity in the muni area, so demand has stepped up to the point where we’re seeing some rather firm pricing on deals and follow-through in the secondary market.”

Muni supply is expected to recover from last week, when the midweek holiday led to little issuance and activity in the market. Industry estimates anticipate $7.07 billion should reach the market this week. That compares with a sparse $105.7 million of volume during the week of the Fourth of July holiday.

JPMorgan priced the TFA building aid revenue bonds rated Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s and Fitch Ratings.

Yields range from 0.66% with coupons of 3.00% and 4.00% in a split maturity in 2015 to 3.98% with a 4.00% coupon in 2042. Debt maturing in 2014 was offered in a sealed bid.

The bonds are callable at par in 2022.

Yields fell between three and seven basis points across the curve on the day, in which a second retail order period was also held.

Citi priced $399.5 million of Las Vegas Valley Water District general obligation bonds, limited-tax bonds, revenue refunding bonds and revenue water bonds. The bonds are rated Aa2 by Moody’s and AA-plus by Standard & Poor’s.

Final pricing for the deal was not available Wednesday. But 5% coupon yields were lowered five basis points in credits maturing between 2031 and 2033, and seven basis points on 5s in 2037 and 2042 from preliminary pricing on Tuesday, according to MMD analyst Randy Smolik.

Goldman, Sachs & Co., priced for retail $337.7 million of water and wastewater system revenue refunding bonds from Austin and Travis, Williamson and Hays counties in Texas. The bonds are rated Aa2 by Moody’s, AA by Standard & Poor’s and AA-minus by Fitch.

Yields range from 0.52% with coupons of 1.00% and 4.00% in multiple maturities in 2014 to 2.65% with a 5.00% coupon in a split maturity in 2025. Debt maturing in 2013 was offered in a sealed bid.

Credits maturing in 2014 through 2016, as well as from 2025 through 2042 were not offered to retail. The bonds are callable at par in 2022.

Bank of America Merrill Lynch held a preliminary pricing for $224.4 million of Lincoln, Neb., Electric System revenue and refunding bonds after pricing for retail earlier in the day. The bonds are rated AA by Standard & Poor’s and Fitch.

Yields range from 0.25% with a 3.00% coupon in a split maturity in 2013 to 3.30% with a 5.00% coupon in a split maturity in 2037.

San Bernardino, Calif., voted to file for Chapter 9 bankruptcy Tuesday night.

However, even though it’s the third municipality in the Golden State to announce its intent to file, analysts at Trident Municipal Research LLC do not believe the growing wave of filings will drag California into default.

This is because California, by now forcing municipalities to mediate for 60-days prior to filing unless a fiscal emergency is declared, has effectively separated itself as much as possible from local financial meltdowns, Trident wrote in a research post.

“By shutting off funding to local redevelopment agencies and cutting other spending, the state has created the environment for local fiscal pressures to come to a head,” Trident wrote. “California has avoided the ‘Spanish’ risk of centralizing all of the fiscal pain, which thereby creates a problem that is too big to fix. By forcing the weakest links to deal with their specific problems, California may avoid becoming Spain.”

Traders were kept busy late into the afternoon’s session. A trader in Los Angeles said he had been swamped with bids-wanted all day because of the San Bernardino announcement.

The news, though, did not arrive as a surprise, he added.

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