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The Week Ahead

NYC Leads With $800M, San Francisco Next With $686M

Volume in the municipal market is bulking up this week.

The industry expects $9.19 billion to reach the primary, compared with $6.83 billion that arrived last week. And it should meet a degree of demand largely unscathed from last week’s slight backup.

Then, the market saw yields for tax-exempts stall from their almost inexorable push into record territory on the intermediate and long ends of the curve. But demand for paper remains strong, as investors have money they want to put to work before macroeconomic trends, such as troubles in the euro zone, intervene and likely push muni yields even lower.

This is evident in muni bond mutual fund flows, which continue to be pretty robust, said Guy Davidson, head of U.S. municipals at AllianceBernstein.

“There’s an appetite for municipal fixed income; intermediate, long and high-yield portfolios all have positive cash flows right now,” he said. “And as supply picks up this coming week, looking out the next month or two, you’ve got coupon payments and bonds being redeemed. People have money to put to work.”

A closer look at the volume shows that $2.73 billion in competitive offerings is scheduled for sale, compared with a revised $1.70 billion last week. In addition, $6.46 billion in negotiated deals is slated for sale, versus a revised $5.13 billion last week.

The bigger calendar is a function of where rates are, and it makes sense to do a lot of refundings here, according to John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney.

Austerity measures that have been the dominant theme for most issuers since last year remain in place. The new-money component would most likely start to build after states get through the 2012 fiscal year, or post-July 1 for most, he added.

“But next week’s size is still pretty impressive, especially at the absolute rate levels we’re at right now,” Dillon said. “We’d look at any interim pullback as an opportunity to get in.”

The week’s biggest deal hails from the negotiated market, where Bank of America Merrill Lynch on Wednesday is expected to price $800 million of New York City general obligation bonds in two series. They are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings. The first series, $750 million, and the second, $50 million, should arrive as serials, with maturities in 2012 through 2032.

B of A Merrill is also expected to price $650 million of San Antonio electric and gas systems revenue refunding bonds. They are rated Aa1 by Moody’s, AA by Standard & Poor’s and AA-plus by Fitch. They are expected to arrive Tuesday at the earliest.

Citi is expected to price $432 million of Washington state federal highway grant anticipation revenue bonds for the SR 520 Corridor Program. The bonds are rated Aa2 by Moody’s and AA by Standard & Poor’s. They are expected to arrive Tuesday, structured as serials that mature from 2015 through 2024.

Barclays Capital is expected to price $384.3 million of San Diego County Regional Transportation Commission sales tax revenue, limited-tax bonds. They are rated Aa2 by Moody’s and AAA by Standard & Poor’s.

The bonds should arrive on Wednesday. They will be structured as both serials and terms, with maturities in 2013 through 2032, as well as 2037, 2042, and 2048.

The competitive space boasts some large deals, as well. The San Francisco Public Utilities Commission leads the way as it expects to auction $686 million of water revenue and refunding bonds in two series.

The bonds, which are expected Tuesday, are rated Aa3 by Moody’s and AA-minus by Standard & Poor’s. They should arrive structured as serials, maturing in 2031 through 2042.

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