Market Post: Market Focuses on Primary to Stimulate Secondary

Tax-exempts opened quiet Wednesday morning as traders looked to the primary to energize the market.

The majority of the week's largest deals were expected to price later in the day.

"It's still kind of quiet," a New York trader said. "There are new issues going on." He added the market is looking at the North Carolina general obligation bonds pricing in the competitive market to provide direction for the secondary.

In the primary market Wednesday, Bank of America Merrill Lynch is expected to price for retail $520.9 million of Los Angeles Department of Water and Power revenue bonds, rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's and Fitch Ratings. Institutional pricing is expected Thursday.

Piper Jaffray & Co. is expected to price tax and revenue anticipation notes for California's school-cash reserve program in a multi-series deal, the largest of which is $449.7 million. The smaller portions of the deal are $140.61 million, $47.83 million, $37.83 million, and $23 million.

Barclays is expected to price $435 million of New York City Municipal Water Finance Authority water and sewer second general resolution revenue bonds following a retail order period Tuesday. The bonds are rated Aa2 by Moody's and AA-plus by Standard & Poor's.

Bank of America Merrill Lynch is expected to price for institutions $115 million of triple-A rated Delaware general obligation refunding bonds, following a retail order period Tuesday.

In retail pricing, yields ranged from 0.66% with 3% and 4% coupons in a split 2017 maturity to 2.42% with a 3% coupon in 2026. The bonds are callable at par in 2023.

In the competitive market, North Carolina is expected to auction $692.3 million of GOs in two pricings: $347.7 million and $344.6 million.

California's Santa Clara County should auction $490 million of GOs, rated AA-plus by Standard & Poor's and Fitch.

On Tuesday, municipal bond market scales finished steady to stronger.

Yields on the Municipal Market Data triple-A GO scale ended flat to two basis points lower. The 10-year yield and the 30-year yield finished steady at 1.85% and 2.92%, respectively. The two-year yield fell one basis point to 0.31% after trading steady at 0.32% for five sessions.

The Municipal Market Advisors 5% coupon triple-A benchmark scale ended steady for the second session. The 10-year yield closed flat at 1.87% for the fourth session while the 30-year yield also closed flat for the fourth session at 2.99%. The two-year closed unchanged at 0.35% for the 16th session.

Treasuries were steady Wednesday morning after weakening Tuesday. The benchmark 10-year yield and the 30-year yield were flat at 2.03% and 3.21%, respectively. The two-year was steady at 0.28%.

In economic news, housing starts fell 8.5% to a seasonally adjusted annual rate of 890,000 in January. Building permits rose 1.8% to a seasonally adjusted annual rate of 925,000.

January starts were short of the 925,000 expected by economists while permits beat the 915,000 rate predicted by economists.

"Although headline housing starts posted a larger-than-expected decline in January this does nothing to change our view that housing is recovering and that construction spending will add to GDP growth in 2013," wrote economists at RDQ Economics. "First, starts are volatile around the turn of the year and revision prone. Second, the decline in January was entirely in the volatile multi-family sector. Third, the regional pattern of starts would fit with the winter weather patterns as December was usually mild. Fourth, building permits rose in January and the level of permits is above the level of starts, which suggests a further gain in starts in the months ahead. We think the growth in housing activity will be one of the strongest areas of the economy this year."
In other economic news, January producer price index rose 0.2% while the core figure also rose 0.2%.

"Core inflation trends seem fairly stable at the wholesale level at around 2% but there are no signs of deflation," RDQ economists wrote. "Our view is that there will be no easing of wholesale inflation pressures in 2013 and we think commodity prices have the potential to moderately raise wholesale price pressures in 2013."

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