Investors in the municipal market are still looking for tax-exempt paper, but face a subdued calendar for the week.
Potential volume is expected to total $5.39 billion, down from $6.36 billion last week. Still, the market looks healthy on a relative-value basis to Treasuries, industry pros say.
Leading the way, California is expected to bring the largest issue to market: $10 billion of revenue anticipation notes starting Tuesday. Bank of America Merrill Lynch should lead all long-term bond issues as it expects to price $777.2 million of Energy Northwest, Washington, revenue bonds.
Diving into the numbers, there are $4.16 billion of munis scheduled for negotiated sale this week, versus a revised $3.99 billion last week. Bonds scheduled for competitive sale this week total $1.24 billion, compared with $2.31 billion last week.
A week of rising yields and light trading has done little to dampen investors' appetite for tax-exempt paper, analysts say. That's because munis remain attractive to Treasuries, said John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney.
While muni ratios to Treasuries are "anywhere in the range between 104% and 118%, the municipal market is keeping its eye on the longer picture, which is that it's a value on a relative basis here," he said. "The market is probably looking ahead into next month, which historically still has light issuance. The market's in a pretty good place."
Muni ratios to Treasuries closed out Friday's session down for the week. The two-year ratio finished at 107%. The 10-year and 30-year ratios each closed at 106%.
The California Rans have the market's full attention. They are rated MIG-1 by Moody's Investors Service, SP-1-plus by Standard & Poor's and F-1 by Fitch Ratings. JPMorgan and Wells Fargo will hold a two-day retail order period starting Tuesday. Institutions should be able to participate on Thursday.
There's an appetite for this kind of short-term paper, even given the huge issuance, said Michael Brooks, senior portfolio manager at AllianceBernstein. But it depends on what kind of price they offer for it, he added. "Remember, these aren't even GO bonds; they're below GO bonds in California," Brooks said. "So, they're going to have to offer some sort of extra yield here to sell these things."
But will they be able to sell them? "I'm pretty sure they'll be able to," he added. "There's a market out there; they're not going to be stuck with it."
The Rans, to be used to pay for current expenditures, rely on expected state revenues. But as California is a big state, Brooks expect the revenues to show up.
Still, $10 billion is a lot of debt, he added. Even if they price it cheaper, it's still at the short end of the yield curve. "And the yield curve is extremely steep, meaning that shorter yields are very, very low, and they may find a problem," Brooks said. "We'll see."
B of A Merrill should lead all long-term bond issues as it expects to price $777.2 million of Energy Northwest, Columbia Generating Station electric revenue bonds. The bonds are rated Aa1 by Moody's, AA-minus by Standard & Poor's, and AA by Fitch. The bonds are set for Wednesday.
Goldman, Sachs & Co. is expected to price $500 of Chicago Board of Education unlimited-tax GOs for dedicated revenues. The bonds are rated A1 by Moody's and A-plus by S&P and Fitch.
The bonds, expected Tuesday, should arrive structured as both serials and terms.
On the competitive side, San Francisco is expected to auction $290.3 million of GOs in two series. The bonds are rated Aa2 by Moody's, AA by Standard & Poor's, and AA-minus by Fitch.
The bonds should arrive in two series, $251.9 million and $38.4 million. They are expected to arrive structured as serials, maturing 2013 through 2032.
The New Jersey Environmental Infrastructure Trust is expected to price $198.4 million of refunding bonds. The bonds are rated triple-A by the major rating agencies. They are expected to arrive structured as serials, maturing from 2013 through 2026.