NEW YORK – The municipal market was mostly flat Monday amid fairly light secondary trading activity.
“There isn’t a whole lot of trading going on in the secondary,” a trader in San Francisco said. “There are some bits and pieces trading, but it’s a quiet session for the most part. There will be some decent activity in the primary this week, so there could be some interest there, but we’re just unchanged at this point. We had some firmness that carried through to late last week, but that’s sort of faded at this point and we’ve just been flat since late last week.”
The Treasury market showed some losses Monday. The benchmark 10-year note was quoted recently at 2.96% after opening at 2.91%. The 30-year bond was quoted recently at 4.07% after opening at 3.99%. The two-year note was quoted recently at 0.57% after opening at 0.55%.
The Municipal Market Data triple-A scale yielded 2.58% in 10 years and 3.67% in 20 years Monday, following levels of 2.57% and 3.67% Friday. The scale yielded 3.97% in 30 years Monday, matching 3.97% Friday.
“It’s a bit of a quiet start,” a trader in New York said. “I’d say we’re pretty much flat at this point.”
Monday’s triple-A muni scale in 10 years was at 87.2% of comparable Treasuries and 30-year munis were at 97.8%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 99.8% of the comparable London Interbank Offered Rate.
Minnesota will lead a modest slate of new state and local government debt issuance this week as it comes to market Tuesday with a competitive $865 million general obligation deal.
Municipalities are scheduled to float $5.45 billion of debt this week, according to data from The Bond Buyer and Ipreo. The calendar includes $4 billion in negotiated deals and $1.45 billion in competitive deals. The market digested $7.59 billion of new municipal bonds last week.
The Minnesota offering is broken into three pieces. A $635 million tax-exempt component will raise proceeds to finance programs and projects for a variety of purposes, including educational facilities, parks, and pollution-control facilities.
A second tax-exempt piece, with $225 million in par value, will raise money for improvements and projects on the state's trunk highway system.
A $5 million taxable portion of the deal will be used to finance programs for the state's Rural Finance Authority.
Both tax-exempt portions will spread maturities evenly from 2011 to 2030. The taxable portion will mature in 2015.
Minnesota will have $5.6 billion of outstanding GO debt after this deal. The state is rated Aa1 by Moody's Investors Service and AAA by Fitch Ratings.
Also on the calendar is an $850 million New York City Transitional Finance Authority deal, which is scheduled to price Wednesday.
New York City is expected to finance about half its capital projects through the TFA, whose debt is backed by the city's income and sales taxes.
The deal, led by Citi, will have four components, three of which are taxable and one of which is tax-exempt.
The taxable portions include $470 million of BABs, $125 million of qualified school construction bonds, and $100 million of adjustable-rate taxable paper.
The tax-exempt portion has a $155 million face value. The personal income tax revenues that secure bonds issued by the TFA totaled $6.7 billion in fiscal 2009 and are projected to increase to $8.7 billion by fiscal 2014. The 4.5% sales tax led to $4.7 billion in tax receipts in fiscal 2009, and is projected to rise to $6 billion by 2014.
Moody's rates the issue Aa1.
Also, the Michigan Finance Authority plans to sell $745.9 million of state aid revenue notes in a deal lead by Siebert Brandford Shank & Co.
The proceeds will be used to lend money to school districts in the state to help cover cash shortfalls expected to occur in the next year.
The notes will mature in August 2011, and are secured by letters of credit from either Scotia Bank or JPMorgan.
The state aid revenue notes are not obligations of Michigan. The bonds are collateralized by the school districts' loan repayments, which in turn are secured mainly by local property taxes.
In the new-issue market Monday, Bank of America Merrill Lynch priced for retail investors $150.4 million of lottery revenue bonds for the West Virginia Economic Development Authority.
The bonds mature from 2011 through 2030 with term bonds in 2035 and 2040. Yields range from 0.55$ with a 2% coupon in 2011 to 4.44% with a 4.25% coupon in 2030. Bonds maturing in 2021, 2022, 2024, from 2027 through 2029, and in 2035 and 2040 were not offered during the retail order period.
The bonds, which are callable at par in 2020, are rated A1 by Moody’s, AAA by Standard & Poor’s, and A-plus by Fitch.
Alan Schankel, managing director at Janney Capital Markets, wrote in a commentary that “the paradigm of moderate supply and strong demand continues to push tax free yields lower, al¬though the pace of the decline in yields is lagging that of benchmark Treasury yields.”
However, Schankel added, “not all parts of the yield curve are participating equally in the rally.”
“Short and medium term ma¬turities have benefited disproportionately, with yields for two, five and ten-year maturities reaching record lows,” he wrote. “On the other hand, yields for longer maturities, more subject to inflationary concerns, are still above record levels, but are approaching the pre-crisis levels of early 2008. So although levels over much of the yield curve are at low points, the spread, the differential between short term and long term yields is the highest in at least a decade.”
“Given the increasingly uncertain economy it seems highly unlikely that monetary policy will tighten in the near future, so duration extension, to take advantage of the sharp curve slope, may be an appropriate strategy for increasing total return,” Schanckel wrote. For laddered portfolios, our favored municipal portfolio approach, extending the ladder by a few years--for example, adjusting a twelve year ladder to fifteen years--should be considered to increase total return.”
In economic data released Monday, construction spending edged higher by 0.1% in June, while economists were expecting a decrease, as federal construction reached a record high.
May’s construction spending was revised sharply lower to a decrease of 1.0% from a 0.2% decrease reported last month. Construction spending in April increased 2.3%.
Economists expected June construction spending would fall 0.5%, according to the median estimate from Thomson Reuters.
The overall economy grew for the fifteenth straight time after seven months of contraction, while the manufacturing sector expanded for the twelfth time after eighteenth months of contraction, the Institute for Supply Management reported this morning.
According to the ISM’s monthly report on business, the ISM index dipped to 55.5 in July from 56.2 in June.
Economists polled by Thomson Reuters predicted the index would fall to 54.1.
Visible Supply
The Bond Buyer’s 30-day visible supply rose $198.7 million to $7.341 billion. The total is comprised of $1.904 billion of competitive bonds and $5.437 billion of negotiated bonds.
Previous Session's Activity
The Municipal Securities Rulemaking Board reported 34,854 trades of 12,234 issues for volume of $11.82 billion. Most active was insured Port Authority of New York and New Jersey 5.75s of 2032 that traded 175 times at a high of 101.750 and a low of 97.590.
