Michael Pietronico

As issuers prepare to bring more than $4 billion in long-term supply to the primary market this week, negative headlines regarding ongoing mutual fund outflows, as well as the impact of a weakening market for Puerto Rico’s debt and potential fallout from the debt-ceiling debate, continued to weigh on the municipal market.

Michael Pietronico, chief investment officer at Miller Tabak Asset Management said the lack of supply is helping to stem some, though not all, of the price volatility. “Puerto Rico has blown Detroit away as the number one problem for the municipal market,” he said on Friday. “It remains challenging to find consistant demand outside of 10 years on the municipal yield curve, so sluggish supply should keep the trend in weaker prices from picking up pace.”

According to Ipreo LLC and The Bond Buyer, new volume is set to include $4.19 billion of negotiated and competitive deals, led by a $955.8 million offering from the Dormitory Authority of the State of New York. That compares with a revised $3.51 billion in the prior week, according to Thomson Reuters.

“That said, it is obvious that outflows from municipal mutual funds are weighing on sentiment negatively,” Pietronico added. “Puerto Rico is reason number one mutual fund outflows have picked up again.”

OnThursday, Lipper FMI reported that investors withdrew $729 million from municipal bond mutual funds for the week ended Oct. 9 -- in what was the 20th consecutive week of outflows.

A New York underwriter said the market displayed a quiet pre-holiday tone on Friday ahead of a three-day weekend to celebrate Columbus Day. but earlier in the week he observed decent new-issue activity, regardless of any larger market and political concerns.

He expects the largest issues pricing next week, such as the Dorm deal and a $360 million financing from Battery Park City Authority, will be “very acceptable and should do well.”

Issuers hope their deals will gain recognition and attention amid the barrage of existing concerns hanging over the market, the latest of which was a warning from Fitch Ratings on Friday that said it would consider putting the United States on rating watch negative if the debt ceiling is not raised before the Treasury reaches its $16.7 trillion limit on Oct. 17.

The Dorm deal -- the week’s largest -- is expected to test the market when it is priced by JPMorgan Securities on Thursday, following a retail order period on Wednesday. The deal is comprised of state sales tax revenue bonds rated AAA by Standard & Poor’s and AA by Fitch.

The Battery Park deal consists of senior revenue debt to be priced by Citi on Wednesday, after a retail order period on Tuesday. The $353.6 million tax-exempt serial bonds mature from 2014 to 2026, while the $6.8 million taxable debt matures in 2014 and 2015. The bonds are rated triple-A by Moody’s and Standard & Poors.

Evidence of headline volatility continued to spook the market last Friday as the benchmark, triple-A general obligation scale ended unchanged at a 4.18%,  up from 4.11% last Monday, according to Municipal Market Data. Last Wednesday munis were weaker in sympathy with Treasuries as some Puerto Rico bonds. some in blocks as large as $2 million or higher, were said to have traded lower because of the recent downgrade by Moody’s Investors Service of $6.8 billion of COFINA debt to A2 from Aa3. The rating company cited a weak economy and a much weaker underlying credit rating.

Yields for the commonwealth’s debt soared to double digits in the secondary market last week as investors continued their concern over budget reform, cost-cutting and revenue generation measures, and pension and tax reforms under the Gov. Alejandro Garcia Padilla administration.

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