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Muni Issuance Winds Down for the Year End

DEC 16, 2012 6:52am ET
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After two hefty weeks, issuance in the municipal bond market should enter its holiday period and ride out the rest of the year.

More than $20 billion reached the market over the last two weeks, which it absorbed with mixed success. This week, a total of $2.39 billion is expected, compared with $10.6 billion last week.

Still, the muni market isn’t ready to turn out the lights completely on 2012. The next two weeks should have a degree of activity.

This is because, for one, investor demand persists. And investors, uncertain about possible tax-related changes to come, are anxious to lock in capital gains they’ve made in the muni market. Munis have been in a multi-year bull market, creating huge capital gains, said Dan Heckman, senior fixed income strategist, U.S. Bank Wealth Management.

“Some of the results have come from investors wanting to ensure that they’re paying a very low level of taxes on those gains,” he said. “That’s played a major role in the selloff over the last week, week and a half.”

Munis may see a small rally heading into year end as supply ebbs, he added.

As investors continue their search for yield, munis emerge as an asset class that can deliver, relative to its fixed income brethren, said Paul Montaquila, vice president of fixed income for San Francisco-based Bank of the West. Treasuries and agencies yield precious little, he said, and quality corporate bonds get devoured prior to reaching the secondary market.

“What’s next in line … the municipal bond market,” Montaquila said. “And the market is coming off another phenomenal year — not quite as good a year as it had in 2011. The appetite for muni bonds is only growing, especially with the tax implications that everyone is expecting next year.”

Questions surrounding dividend and the capital gains taxes should enhance the demand for municipal bonds, Montaquila added.

Looking at the numbers more closely, there are $2.08 billion of municipal bond sales scheduled for negotiated sale this week, versus a revised $8.41 billion that were sold last week. Bonds scheduled for competitive sale this week total $309.1 million, compared with $2.18 billion last week.

For the negotiated side of the calendar Jefferies & Co. is expected to price between $550 million to $850 million of the Metropolitan Transportation Authority’s Triborough Bridge and Tunnel Authority senior and subordinate revenue bonds, depending upon market conditions. The bonds are rated A1 by Moody’s Investors Service and A-plus by Standard & Poor’s and Fitch Ratings.

A retail order period is expected on Monday with pricing set for Tuesday. The credits should arrive structured as serials, term bonds and capital appreciation bonds with a maximum maturity of 2032.

Jefferies is also expected to price an additional $80.5 million of general revenue bonds for the authority. These bonds are rated Aa3 by Moody’s and AA-minus by S&P and Fitch.

JPMorgan is expected Tuesday to price $300 million of Bon Secours Health System Obligated Group composite issue revenue bonds. The bonds are rated A3 by Moody’s and A-minus by Standard & Poor’s and Fitch.

The revenue bonds should be broken down into $185 million for the South Carolina Jobs Economic Development Authority; $55 million for Henrico County, Va., Economic Development Authority; $40 million for Russell, Ky.; and $20 million for Norfolk, Va., Economic Development Authority.

Morgan Stanley is expected to price $230.5 million of Massachusetts general obligation Sifma index refunding bonds Wednesday. They are rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch, and mature in 2017.

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