Munis Largely Unchanged; Philly Prices GOs

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The municipal market was largely unchanged yesterday in light activity, and Philadelphia accelerated pricing on its $165 million general obligation bond sale, bringing it to market yesterday instead of today.

"There's not much going on right now," according to a trader in New York. "And actually, we're close enough to the holidays and we have a light enough new-issue calendar that it's debatable whether there is going to be anything much going on between now and Christmas. It's not like the market's been in great shape recently as it is. I think there's a significant chance people just man the sidelines through the holidays now."

The Treasury market showed some gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.57%, finished at 2.52%. The yield on the two-year note was quoted near the end of the session at 0.73% after opening at 0.76%. The yield on the 30-year bond, which opened at 3.04%, was quoted near the end of the session at 2.98%.

In the new-issue market yesterday, Morgan Stanley priced $165 million of GO bonds for Philadelphia, which were originally slated for pricing today. However, due to stronger than anticipated demand during today's retail order period, the institutional pricing was moved up as well.

"We got over $100 million in retail, which is stronger than we had hoped for," said city Treasurer Rebecca Rhynhart. "So, we increased the deal size to $165 million and then opened it up to institutional buyers."

The bonds mature from 2009 through 2018, with term bonds in 2023, 2028, and 2038. Yields range from 3.50% with a 4% coupon in 2009 to 7.25% with a 7.125% coupon in 2038. The bonds, which are callable at par in 2016, are insured by Assured Guaranty Corp. The underlying credit is rated Baa1 by Moody's Investors Service, BBB by Standard & Poor's, and BBB-plus by Fitch Ratings.

In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote that last week that "primary and secondary supply swelled to cap off the year, pushing yields higher," and that "shorter maturity, high-grade loans were generally better received."

"Municipal bond yields have risen in 15 straight trading sessions since Thanksgiving," he added. "Pricing and hedging difficulties continue to dissuade institutional investment, while credit problems, both real and imagined, may begin to undermine demand from individuals. These pressures, which are undermining even traditional roll-down plays - where investors buy, for example, 11-year bonds in December in expectation of a bump in value when they become 10-year bonds in January - show little sign of abating through year-end. However, the next few weeks present a reasonable opportunity to buy - hig-grade, shorter maturity - bonds for near-term performance."

George Friedlander, managing director and fixed-income strategist at Citi, wrote in a weekly report that, despite the fact that the muni market will "remain under pressure from an ongoing heavy calendar of deals, many of which were delayed during the fourth quarter market disruptions," there is a rather lengthy list of reasons to believe the market will do better during the new year, heavy supply notwithstanding.

Friedlander said the reasons for this include "the return of at least some crossover buyers, who will be attracted by the impressive total return opportunities to be had as the muni market normalizes. They will be attracted, in particular, by the fact that the credit concerns are not as severe as in the corporate sector, in our view."

Friedlander also cites as reasons "the continued collapse in short-term rates, with the Fed pulling fed funds to zero, and short-term Treasuries providing zero returns;" "investors will come to recognize that state budgetary crises are not the same as debt crises;" "the U.S. savings rate is set to move sharply higher according to our economists;" and "our economists believe that long-term Treasury will stay low by historical standards for a number of years, at the very least."

In the last full trading week before the municipal market slows for its usual holiday pause, uncertainty continues due to the status of Illinois' $1.4 billion general obligation certificate sale, with few other new deals on tap to fill the void amid overall market weakness and volatility.

According to Thomson Reuters, there is an estimated $1.53 billion of total volume on the horizon this week, compared with a revised $5.57 billion last week. If the Illinois certificates sale does not end up pricing, there will be slim pickings of other new issuance in the primary market.

The Illinois sale was originally scheduled in the competitive market last Thursday, but state officials last Wednesday postponed the deal due to fallout from Gov. Rod Blagojevich's corruption scandal, and as of late last week the deal was still awaiting final approval of transaction documents from some state officials, including the Illinois attorney general.

Standard & Poor's put the state's AA rating on CreditWatch negative based on concern over its ability to handle its budgetary shortfall - a projected $2 billion for the current fiscal year - considering the legal charges facing the recently arrested governor and his chief of staff.

The deal is expected to have three tranches maturing in 2009 - $400 million due April 24, $600 million due May 25, and $400 million due June 24, according to the POS. Proceeds are expected to be used to help pay down a record backlog of $4 billion of unpaid bills. Moody's rates Illinois' GOs Aa3 and Fitch gives them a AA.

Activity in the new-issue market today was light.

In economic data released yesterday, the Empire State Manufacturing Survey indicated "that conditions for New York manufacturers deteriorated significantly in December," as the general business conditions index declined to negative 25.76 in December from negative 25.43 in November. Economists surveyed by Thomson Reuters had expected the index would be negative 27.50.

Industrial production in the nation was down 0.6% in November while capacity utilization fell to 75.4. The drop in production level followed a 1.5% increase the previous month, while October capacity use was revised down to 76.0. Thomson had forecast a 0.8% decrease for production, and a 75.7% level for capacity utilization.

More economic data will be released this week. The November consumer price index and the core index will be released today along with November housing starts and building permits. Initial jobless claims for the week ended Dec. 13 will be released Thursday in addition to the November composite index of leading economic indicators.

Economists polled by Thomson Reuters are predicting a 1.3% drop in CPI, a 0.1% rise in the CPI core, 740,000 housing starts, 700,000 building permits, 560,000 initial jobless claims, and a 0.5% decline in LEI.

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