The municipal market was largely flat yesterday, amid fairly light trading activity in the secondary as the week got off to a slow start.
“There isn’t a whole lot of activity out there, and there’s not much movement,” a trader in New York said. “We’re just kind of unchanged at the moment, with some bits and pieces trading but fairly quiet overall. A typical Monday, really.”
“There’s just not a lot happening,” a trader in Los Angeles said. “It’s pretty quiet. We should see a decent pickup in activity the rest of the week, but it’s basically just quiet and flat today.”
The Treasury market showed some losses yesterday. The benchmark 10-year note finished with a yield of 3.58%, after opening at 3.56%. The yield on the two-year note finished at 0.78% after opening at 0.76%. The yield on the 30-year bond was quoted near the end of the session at 4.52% after opening at 4.51%.
The Municipal Market Data triple-A scale yielded 2.86% in 10 years and 3.77% in 20 years yesterday, matching Friday’s levels. The scale yielded 4.14% in 30 years yesterday, also matching Friday’s level.
Friday’s triple-A muni scale in 10 years was at 80.6% of comparable Treasuries and 30-year munis were 92.0% of comparable Treasuries according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 96.5% of the comparable London Interbank Offered Rate.
Higher education, transportation, essential services, and Build America Bond offerings feature in the market this week as part of an estimated $5.36 billion in new volume, according to Ipreo LLC and The Bond Buyer.
This week’s activity, which will be led by a $540 million financing from the Connecticut Health and Educational Facilities Authority on behalf of Yale University, is slightly lower than last week’s revised $4.05 billion volume, according to Thomson Reuters.
The Connecticut deal will be priced tomorrow by Barclays Capital and JPMorgan after being offered to retail investors Tuesday. The bonds have natural triple-A ratings from Moody’s Investors Service and Standard & Poor’s.
A two-pronged GO deal, meanwhile, is being planned by Hawaii and will be priced by Citi tomorrow, following a retail order period today.
The deal, which totals $534 million, consists of $312 million of BABs maturing serially from 2015 to 2030, and $222 million of tax-exempt GOs, maturing serially from 2015 to 2020. Both series are rated Aa2 by Moody’s, and AA by Standard & Poor’s and Fitch Ratings.
Citi will price $454 million of senior airport system revenue bonds for Clark County, Nev., that are designated to be sold as BABs when the deal is priced today.
The bonds, which are rated Aa2 by Moody’s and AA-minus by Standard & Poor’s, are structured to mature as one term bond in 2045.
California’s East Bay Municipal Utility District is on tap to sell $400 million of water system subordinate revenue bonds for water projects in Alameda and Contra Costa counties in what will be the district’s first-ever BAB sale.
A syndicate led by co-senior managers Morgan Stanley and JPMorgan will price the maiden BAB sale on Thursday with a structure that consists of a 2040 maturity and ratings of Aa2 by Moody’s, AAA from Standard & Poor’s, and AA from Fitch.
In the competitive market, a two-pronged public facilities revenue offering from the Virginia Public Building Authority totaling $317.2 million is expected to be offered tomorrow, when bidders can either bid on the bonds as tax-exempt debt or BABs.
In a weekly report, George Friedlander, municipal strategist at Morgan Stanley Smith Barney, wrote that, in his view, there is “a strong likelihood that most or all” of the changes floated as part of making the Build America Bond program permanent “will be enacted.”
Those changes would be the subsidy rate being reduced to 28% from 35% effective Jan. 1, that nonprofit organizations including hospitals and universities would be eligible to issue BABs, and that BABs could also be used for current refundings of outstanding tax-exempt issues and for working capital.
Friedlander wrote that the expansion of the program to include nonprofits is the one possible exception, but also wrote: “In terms of potential market effects of these changes, if enacted, we would expect a number to occur.”
“Making the program permanent would increase the number of potential investors in BABs,” he wrote.
“Institutional investors that do not have municipal credit analysis capability on staff have in many cases been slow to enter this market, because they did not view the investment in credit analysis capability for a program with only a 21-month window to be worthwhile,” he wrote. “We would also anticipate that household sector demand for BABs to be used in retirement accounts — through funds or direct purchases — would grow over time.
“Second, the reduction in the subsidy to 28% would push the break-even point at which BABs financing is more attractive to state and local issuers substantially further out along the yield curve — probably out to around 17 to 18 years on high-grade issues, and somewhat shorter on medium-quality issues,” Friedlander wrote.
“Third, the aggregate shift — more sectors allowed to use BABs, but a much longer break-even maturity — would probably result in more of total volume coming in the tax-exempt market, and put modest upward pressure on muni yields as a percentage of Treasury yields,” he said. “Possibly offsetting the latter shift, however, is the impending sunset of the Bush tax cuts, which, if not deferred, would create substantially higher marginal tax rates for higher income investors, and increase the tax rate on dividends and capital gains.
“Fourth, if enacted in this form, the proposal would probably lead to a rush to market for issuers of BABs in the fourth quarter of 2010, as issuers attempt to get as many issues done as possible at the current 35% subsidy rate,” Friedlander wrote. “It is also important to note that the proposal is by no means a 'done deal.’ Changes could occur along the way, as the tax writing committees consider the cost of the subsidy, and the potential for that cost to generate new jobs.”
The economic calendar was light yesterday.