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Market Close: Munis Lower After Soft Primary; Secondary Too Expensive

JAN 29, 2013 4:01pm ET
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The tax-exempt market got off to a slow start Tuesday and stayed that way throughout the day as traders noted sluggish trading and weak demand for primary deals led to a quiet session.

"Everyone is sleeping," a Los Angeles trader said. "It's just a very lackluster day. These rates are still pretty ridiculously low so a lot of people are sitting on their hands."

In the primary market, the trader said it's a "very light calendar. High-grade bonds are eaten up fast because there is tons of cash."

In the secondary, bonds looked too expensive. "In the secondary market you have to pay up for bonds. There is not a lot of interdealer trading there."

Other traders agreed the market was very quiet. "It's very slow," a Pennsylvania trader said. "It still feels heavy from the end of last week. Monday was heavy and I don't think muni scales were cut as much as they should have been. From what I can tell, I sense it's weaker than where the scales are."

While the market feels weaker, this trader said there was a lack of activity.

"The new issues from last week are still floating around and are mostly trading at original or slightly cheaper," wrote Dan Toboja, vice president at Ziegler Capital Markets. "There has been a lot of headline news this week about a rally in the equity markets and the potential 'bond crash' in fixed income. So far the muni market is shrugging it off, but if retail investors begin to take notice, and fund flows begin to drop we will see a reaction in munis."

In the primary market, JPMorgan priced for institutions $1.5 billion JobsOhio Beverage System statewide lien liquor profits revenue bonds, rated A2 by Moody's Investors Service and AA by Standard & Poor's.

The $1.1 billion of taxable senior lien liquor profits revenue bonds, were priced at par to yield from 0.872% in 2015 to 4.532% in 2035. Spreads ranged from 60 to 200 basis points above the comparable Treasury yield.

Yields on the $404.8 million of tax-exempt bonds ranged from 0.50% with a 3% coupon in 2015 to 3.34% with a 5% coupon in 2038. The bonds are callable at par in 2023. Yields were lowered five basis points from retail pricing on bonds maturing between 2017 and 2038.

In the retail order period, demand felt weak, according to sources. "It was priced on the full side for the tax-exempt portion," the Pennsylvania trader said. "It was a split rating and priced in the middle of the road. We did not participate because it was priced too aggressively on the tax-exempt side and there was not a lot of compensation for the litigation risk."

Other traders said weak demand was a function of the overall lackluster market, and not due to the specific deal.

In other primary deals, Wells Fargo Securities priced $208.2 million of West Virginia University Board of Governors taxable and tax-exempt refunding and improvement revenue bonds, rated Aa3 by Moody's and A-plus by Standard & Poor's.

Yields on the first series, $136 million of tax-exempt bonds, ranged from 0.48% with a 3% coupon in 2014 to 3.70% with a 3.625% coupon in 2042. The bonds are callable at par in 2022.

The second series, $72.2 million of taxable bonds, were priced at par with coupons ranging from 0.532% in 2013 to 4.338% in 2042. Spreads ranged from 40 basis points to 165 basis points above the comparable Treasury yield.

Wells Fargo also priced $143.8 million of taxable Austin, Texas, Rental Car Special Facility revenue bonds, rated Baa1 by Moody's, A-minus by Standard & Poor's, and BBB-plus by Fitch Ratings.

The bonds were priced at par to yield 3.837% in 2022 and 5.46% in 2032. Bonds maturing in 2042 yielded 5.91% with a 5.75% coupon. Spreads ranged from 185 basis points to 275 basis points above the comparable Treasury yield. The bonds are callable at par in 2022.

In the competitive market, Citi won the bid for $324.7 million of Florida State Board of Education public education capital outlay refunding bonds, rated Aa1 by Moody's and AAA by Fitch.

Yields ranged from 0.64% with a 5% coupon in 2016 to 2.04% with a 5% coupon in 2023. Bonds maturing in 2014 and 2015 were offered via sealed bid.

In the secondary market, trades compiled by data provider Markit showed a mix of strengthening and weakening.

Yields on Dallas-Fort Worth International Airport 5s of 2045 jumped five basis points to 3.48% while Chicago Metropolitan Water Reclamation District 5.25s of 2035 increased three basis points to 3.20%.

Yields on Massachusetts State College Building Authority 3s of 2030 rose two basis points to 3.16% while Puerto Rico Public Buildings Authority 5s of 2032 rose one basis point to 5.10%.

Other trades were stronger. Yields on Alaska's Northern Tobacco Securitization Corp. 5s of 2046 and Long Beach, Calif., Community College District 5s of 2025 fell two basis points each to 5.80% and 2.22%, respectively.

Reads on the municipal bond market showed softening for the second session this week.

The Municipal Market Data scale ended lower for the fourth session. The 10-year yield rose one basis point to 1.80% while the 30-year yield increased two basis points to 2.84%. The two-year finished steady at 0.34%.

The Municipal Market Advisors 5% coupon triple-A benchmark scale also showed weakening. The 10-year yield and the 30-year yield rose one basis point each to 1.82% and 2.92%, respectively. The two-year held steady at 0.35%.

Treasuries ended weaker Tuesday. The benchmark 10-year yield rose two basis points to 2.00% while the 30-year yield increased one basis point to 3.17%. The two-year was steady at 0.29%.

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