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Market Close: Pa. GOs Pushed Back; UTA on Track

The municipal bond market weathered Monday's snowstorm with mixed results as some deals such as the $1 billion Pennsylvania general obligation bond competitive sale were postponed while others such as the Utah Transit Authority's $832 million offering remained on track.

Prices of high-quality municipal bond were unchanged, according to traders.


Primary Market

The $1 billion general obligation sale from Pennsylvania, originally scheduled to go up for bidding on Tuesday has been pushed back to Feb. 3, according to Steve Heuer, Director of Bureau of Revenue, Capital and Debt for the Governor's Budget Office.

Although the state's budget office is located in Harrisburg, which isn't in the path of the heaviest snow, Heuer said the decision was based on the expectation that most of the Northeast, including New York City, was going to be pummeled. More information was be provided when PFM, the state's financial advisor on the sale, releases an official statement.

The Keystone state's GOs will be structured as serials ranging from 2016 to 2035. The issue is rated Aa3 by Moody's Investors Service and AA-minus by both Standard & Poor's and Fitch Ratings. Pennsylvania last came to market on April 29, 2014 when it sold $834.945 million of GOs to Bank of America Merrill Lynch who won competitively them with a true interest cost of 3.2542%.

The big East Coast snowstorm was also affecting the some of the week's other new issues.

The Katy Independent School District, Texas' $210 million bond sale, which had been expected to be priced by JPMorgan on Tuesday, was placed on a day-to-day schedule, according to traders.

And several other smaller issuers in Pennsylvania, New York, New Jersey, Connecticut, Massachusetts and Maine also postponed their sales, according to Ipreo.

Atlantic City, N.J., postponed its $12 million bond anticipation note sale, originally scheduled for Tuesday. The deal will probably be scheduled for later in the week.

But Morgan Stanley was pricing the biggest negotiated deal of the week -- the Utah Transit Authority's $831.6 million offering.

UTA was going forward with the retail order period on Monday and was considering having the institutional pricing as well.

"There seems to be good investor focus [Monday] morning, and so the window may be open to get it all done [Monday]," said financial advisor Brian Baker, vice president of Zions Bank Public Finance.

The deal will be structured as $639.43 million sales tax revenue refunding bonds, Series 2015A, and $192.21 million subordinated sales tax revenue refunding bonds, Series 2015A.

The senior lien bonds are rated a2 by Moody's Investors Service, AAA by Standard & Poor's and AA by Fitch Ratings while the subordinate-lien bonds are rated A1 by Moody's and A-plus by Fitch.

This week's total new issue volume had been estimated at $6.138 billion, comprised of $3.884 billion negotiated deals and $2.254 billion of competitive sales.

Among other deals, Citigroup Global Markets was slated to price the $385.155 million Kentucky State Property and Building Commission bonds. Glendale, Ariz., planned to come to market with four separate negotiated deals totaling $277.28 million. Also on tap was a $289.21 million competitive sale of GO refunding bonds from San Francisco, Calif. And JPMorgan was scheduled to price the Maryland Health and Higher Educational Facilities Authority's $333.35 million offering for Medstar Health Inc.


Secondary Market

Prices of top-rated munis were unchanged on Monday, traders said.

The yield on the 10-year benchmark general obligation was unchanged from 1.81% on Friday, while the yield on 30-year GOs was flat from 2.59%, according to a read of MMD's triple-A benchmark scale.

Treasury prices were mixed on Monday, with the two-year note yield up to 0.51% from 0.50% on Friday. The 10-year yield was unchanged at 1.83%, while the 30-year yield fell to 2.38% from 2.40%.

On Friday, the 10-year muni to Treasury ratio increased to 98.0% from 96.9% on Thursday, while the 30-year muni to Treasury ratio rose to 107.6% from 106.5%.


MSRB Reports Previous Session's Activity

The Municipal Securities Rulemaking Board reported 33,744 trades on Friday on volume of $9.379 billion.

Most active on Friday, based on the number of trades, was the New Ulm Independent School District, Minn., school building 2015 Series A 3.3% bond of 2040, which traded 142 times with an average price of 98.305 and an average yield of 3.401%.


Baird: Fixed Income Better Than Expected in '14

Craig Elder, director at Robert W. Baird & Co., came out with a research report earlier this month breaking down why fixed-income in 2014 performance was better than most anticipated.

According the Elder, the key to was to take duration risk as longer dated fixed-income worked whether it was in the safety of long-dated Treasuries as the 30-year Treasury bond total return was 29.4% or in lower-rated fixed rate preferred stocks with a 15.4% total return for the year.

"Credit risk was not a major factor in determining performance but investors needed to avoid lower-rated high yield as CCC & lower return were negative 2.6% and single B-rated returns were an anemic 1.3% in 2014," Elder wrote in the report. "Energy debt issues, which are about 15% of most high yield indices, were hit by the collapse of crude oil and natural gas prices."

Elder also mentioned that the big fixed-income performance came from preferred stocks with a 15.4% total return, followed by convertibles at 9.997% and municipal bonds at 9.78%. The weakest performance was in leveraged loans and high yield at 1.82% and 2.50%, respectively.

Municipal bonds also out-performed expectations last year - a feat that looks less likely to be repeated this year.

"In many ways 2014 was a gift - and it can't keep giving forever," Peter Hayes, managing director of the municipal bond group at BlackRock, says in a recent report. "Investors need to remember that munis are designed to be high-quality income vehicles, not drivers of total return.

Hayes feels that while this year may not be as stellar as 2014, it will not be a bad year in comparison to other periods historically. He cited many of the same factors affecting munis in 2015 as in 2014 - the Federal Reserve and interest rates, new issue supply, and concerns about state and local government pension funding.

Hayes says that while muni supply may pick up this year, there is continued high demand for top-quality bonds which will support prices.

He also evaluated the riskier end of the market.

"We think high-yield munis should do better than the broader market again, if only because you have the benefit of carry," according to Hayes. "That said, the sector is already expensive given its recent run, so we wouldn't expect a great deal of price appreciation."

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