The municipal market can expect $8.26 billion of new issues this week, a slight increase from last week, despite rising yields across the curve.
“Last week has been, at best, a C grade in terms of how we accepted new issuance,” said Duane McAllister, portfolio manager of Marshall Funds’ Marshall Intermediate Tax-Free Bond Fund.
Last week’s borrowers faced a market that had just seen a big move in Treasuries and munis after the Federal Reserve’s Operation Twist announcement, so many waited on the sidelines to see the results.
“We came into last week with the expectation of being more of an observer than participant,” McAllister said. “I was very curious to see how our market would react to new yield levels and the increase in supply, and so far it’s proven to be wise to stay on the sidelines.”
Indeed, given last week’s rising yields, it is not clear how the market will react to increased issuance this week. Muni issuance is up from last week’s revised $7.68 billion. The negotiated calendar is expected to see $6.5 billion of new issuance, up from last week’s revised $5.7 billion, and the competitive calendar will see $1.8 billion, down from last week’s revised $1.9 billion.
The biggest deal will be in the negotiated market, where the Lower Colorado River Authority in Texas will issue $625 million of transmission contract refunding and improvement revenue bonds. The lead book-runner on the deal is Morgan Stanley and the bonds are rated A2 by Moody’s Investors Service, A by Standard & Poor’s, and A-plus by Fitch Ratings. The retail order period is on Tuesday and institutional pricing is on Wednesday.
New York’s Triborough Bridge and Tunnel Authority will sell $615 million of general revenue refunding bonds. The serials have maturities ranging from 2012 to 2028 and are rated Aa2 by Moody’s and AA-minus by S&P and Fitch. The lead underwriter is Morgan Stanley. The retail order period is Monday and institutional pricing is Tuesday.
Also in the negotiated market is a $600 million refunding revenue bond issue Thursday by the Palm Beach County, Fla., Solid Waste Authority. The serial bonds have maturities ranging from 2012 to 2031 and are rated AA-plus by Standard & Poor’s. Citi is the lead book-runner.
In the competitive market, the Dormitory Authority of the State of New York will issue $515 million of revenue bonds in two pricings, one for $467 million and another for $48 million. The bonds are scheduled to come to market Tuesday and are rated AA by S&P.
Wednesday will be a big day in the competitive market, with North Carolina issuing almost $400 million of revenue bonds, followed by the Virginia Public Building Authority’s $300 million revenue deal. The Virginia debt will be split into offerings of $280 million and $18 million.
With yields rising all last week, it’s unclear how the market will behave next. “We are still wrestling with where we are this week,” McAllister said. “It’s tougher to get deals pushed through right now.”
He added that in order to see more equilibrium, the market will need to see more stability in the Treasury markets and more investor flows into muni bond funds.
“Our market is still cheap compared to Treasuries and other taxables, and nothing has changed materially,” McAllister said. “We just need to adjust to new levels and that takes time.”
Ron Schwartz, portfolio manager of RidgeWorth Investments’ Investment Grade Tax Exempt Bond Fund, said the market suffered last week because it was the end of the third quarter, and players have limited interest in taking on big positions. But now that the third quarter is over, buyers should be more active.
“If the rally continues in the Treasury market,” he said, “munis on a ratio basis will look very attractive, so that will help the supply.”