California GOs Lead $8.94 Billion New Issue Slate

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Strong overall demand for municipals and opportunities for relatively attractive yields in the new-issue market should propel interest in the coming week's primary market, sized at nearly $9 billion.

A $1.9 billion California general obligation sale expected for pricing on Wednesday by Bank of America Merrill Lynch will headline the new-issue activity as part of an estimated $8.94 billion in long-term volume, according to Ipreo LLC and The Bond Buyer.

Traders said the calendar should benefit from the kind of demand that chased the past week's deals, given investors' positive cash position and favorable market technicals.

"Anything the same or less should be gobbled up pretty well," said a California trader of this week's revised $7.53 billion volume as reported by Thomson Reuters.

"We really only had a few days of outflows and now those flows turned positive again," the trader said, citing Lipper FMI data showing $429.3 million of inflows by weekly reporting municipal bond funds, following $59.04 million of inflows the previous week.

"With the market moving back on Treasuries through 2%, that added a positive tone, and if that holds through to next week, we won't have a problem" getting deals done, the California trader added.

The 10-year Treasury yield increased to 2.01% from 2% at midday Friday.

Meanwhile, much of the past week's value was found in the primary market, observed a New York trader. The largest deal to be priced was $1.25 billion Atlanta water and wastewater revenue refunding on Tuesday. The bonds are rated Aa3 by Moody's Investors Service, AA-minus by Standard & Poor's, and A-plus by Fitch Ratings.

Its final term maturity in 2043 was priced with a 5% coupon to yield 3.41%, 58 basis points higher in yield than the generic triple-A GO scale in 2043 as tracked by Municipal Market Data.

Traders said they expect that value to continue next week -- aided by the boost in supply.

"I think the market is a little tentative with the reasonable amount of supply we saw this week at fair prices," the New York trader said. "Pricing came on the cheap side here this week, but everything got done."

The yield on the 30-year benchmark GO was up as much as two basis points Friday from 2.85%, according to MMD's triple-A scale.

"Customers are in the driver's seat," the New York trader continued. "Because of the supply, they can extract decent value and demand better prices in the primary than the secondary," he added.

With a decently-sized slate on tap, "yields will be relatively attractive for buyers and that will help get the deals done," the New York trader added.

Apart from the expectations of overall strong demand, low supply, an upgrade, and name recognition will enhance the demand for the California GO sale, as well as a $495 million Los Angeles Department of Water and Power revenue sale slated for pricing by Bank of America Merrill on Thursday after a retail order period on Wednesday, the traders said.

The California GO deal should benefit from Thursday's upgrade by Fitch to A-plus from A based on continued improvement in the state's fundamental fiscal position, as well as the relative scarcity of new state GO paper, the California trader said. The GOs are rated Aa3 by Moody's and A-plus by Standard & Poor's.

The last California GO sale was a $1.25 deal sold on Nov. 13, he noted. That deal  came to market on the heels of an upgrade to A-plus by Standard & Poor's, and its 2044 final maturity priced with a 4% coupon at a 3.90% yield - 82 basis points cheaper than the generic, triple-A GO scale in 2044 at the time of the pricing.

The new L.A. deal, meanwhile, will be well received based on its strong double-A rating - not to mention the lack of paper in the state, the California trader added.

On the other hand, the New York trader said California GOs have been "trading a little tight these days" and he wouldn't be surprised if the new bonds come a little cheaper in line with that.

"There's going to have to be a little discount to get deals done, but I think there's money around," the New York trader said.

He described L.A. bonds as "actively traded" and referred to it as a "bellwether" name that should have no problem getting placed.

One of the other largest deals next week includes a two-pronged state of Maryland GO sale totaling $921.9 million and slated for competitive pricing on Wednesday.

The deal, which is rated triple-A by all three major rating agencies, will be sold as $518 million of Series A tax-exempt new money bonds maturing between 2018 and 2030, and $403.9 million of Series B tax-exempt GO refunding bonds maturing from 2015 to 2026.

Proceeds from the Maryland bonds will finance capital grants for schools, college, jails and other correctional facilities, as well as funds and grants to local governments for nonprofit institutions and other entities for hospital and cultural projects.

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