Munis Flatter and Firmer; S.F. Prices Deal

The municipal market was mostly flat with a slightly firmer tone Thursday amid elevated secondary trading activity. The San Francisco Public Utilities Commission competitively sold $344.2 million of taxable Build America Bonds as the long end of the muni curve stayed above the long Treasury yield.

“The market still is very firm in spite of Treasuries going down,” a trader in Los Angeles said. “I think it has a lot to do with supply and demand. There is really very little supply in the marketplace. All the new issues seem to come to market priced through with the expectations of where its going to be. At higher prices they do tend to get cleaned up.”

The trader also noted that the secondary market “has been active today.”

“I have noticed that things were marked up from yesterday, and are actually trading today,” the trader said. “You get the picture that Treasuries really don’t govern the municipal market. I think what it’s really governed by right now is the supply and demand. And there’s not enough supply and there seems to be a little more demand than supply. It seems to be firm.”

In the new-issue market the San Francisco PUC competitively sold $344.2 million of taxable BABs to Bank of America Merrill Lynch with a true interest cost of 3.81%.

The BABs mature from 2022 through 2027 with a term bond in 2040. Yields range from 4.90% in 2022, or 3.19% after the 35% federal subsidy, to 6.00% in 2030, or 3.90% after the subsidy, all priced at par.

The bonds were priced to yield between 195 and 275 basis points over the comparable Treasury yield.

The San Francisco agency also competitively sold $102.7 million of tax-exempt bonds to JPMorgan with a TIC of 2.53%.

The bonds mature from 2015 through 2021, with yields ranging from 1.51% with a  5% coupon in 2015 to 3.00% with a 3% coupon in 2021. Bonds maturing in 2016 were not formally re-offered. The bonds are callable at par in 2020.

The credit is rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s.

The Treasury market showed losses Thursday. The benchmark 10-year note was quoted near the end of the session at 2.94% after opening at 2.87%. The 30-year bond finished at 3.95% after opening at 3.93%. The two-year note was quoted near the end of the session at 0.57% after opening at 0.56%.

The Municipal Market Data triple-A scale yielded 2.57% in 10 years and 3.67% in 20 years Thursday, matching Wednesday levels. The scale yielded 3.97% in 30 years Thursday, also matching Wednesday.

Thursday’s triple-A muni scale in 10 years was at 88.0% of comparable Treasuries and 30-year munis were at 100.8%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 107.3% of the comparable London Interbank Offered Rate.

The yield environment also contributed to the Rector and Visitors of the University of Virginia’s $190 million competitive offering Wednesday crossing below 5% threshold, yielding 4.90% before accounting for the 35% federal subsidy. It yielded 3.19% after the subsidy.

“You are talking about a specialty state area, and this exemplifies those characteristics given that the fact you do have a scarcity of paper in Virginia,” said Howard Mackey, president of the broker-dealer division of Rice Financial Products. “From a BAB situation you might have a local appeal, with a high-quality name in this marketplace. Virginia paper was still quite attractive.”

Elsewhere in the new-issue market, Citi priced $286.2 million of general obligation refunding bonds for Massachusetts in two series.

Bonds from the noncallable $120.4 million Series B contain split maturities in 2014 and 2015, with a low yield of 1.03% with a 2% coupon in 2014 and a high of 1.62% with a 4% coupon in 2015.

Bonds from the $165.8 million Series C also contain split maturities in 2014 and 2015, with a low yield of 1.05% with a 3.5% coupon in 2014 and a high yield of 1.64% with a 5% coupon in 2015. The bonds are not callable.

The credit is rated Aa1 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch Ratings.

Bank of America Merrill priced $277.1 million of military housing taxable revenue bonds for AMC Communities LLC.

The bonds mature in 2028, 2038, and 2053, yielding 5.19% with a  5.74% coupon, 6.44% with a 5.87% coupon, and 6.81% with a 5.94% coupon, respectively. The bonds were priced to yield 225, 250, and 287.5 basis points over the 20, 30, and 30-year Treasury yields. The credit is rated AA by Standard & Poor’s.

In economic data Thursday, initial jobless claims rose 37,000 to 464,000 for the week ending July 17, but the four-week moving average for continuing claims decreased by 223,000 to 4.487 million for the week ending July 10.

Economists expected 445,000 initial claims and 4.650 million in continuing claims, according to the median estimate from Thomson Reuters.

Existing home sales fell 5.1% to a 5.37 million annual rate in June. Economists polled by Thomson expected 5.100 million existing home sales. Sales in May were unrevised at 5.660 million.

The composite index of leading economic indicators slid 0.2% in June. LEI was revised to up 0.5% in May.

Economists polled by Thomson Reuters predicted LEI would be down 0.3% in the month.

Priti Patnaik contributed to this column.

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