The municipal market was unchanged to slightly weaker yesterday, kicking off what’s expected to be a heavy week of new issuance.
“I think we’re off maybe a couple basis points on the bid side,” a trader in Chicago said. “It’s kind of a new level. It seems people are nibbling at it. There’s been a couple interesting trades, very slight adjustments. I think this week is going to be wait-and-see. I get the sense that we’ve made a correction in the past couple of weeks. It’s going to depend on a fair amount of volume. This week seems a little more weighted in the BABs — last week was more of the regular issue stuff. We’ll have to see how the balances of last week’s deals clean up.”
“We’re a little bit weaker, if anything,” a trader in Los Angeles said. “I’m not seeing too much movement, but there’s a bit of a weaker tone, and it’s maybe down a basis point or two in spots.”
The Treasury market showed losses yesterday. The yield on the benchmark 10-year note opened at 3.48% and was quoted near the end of the session at 3.56%. The yield on the two-year note opened at 1.00% and was quoted near the end of the session at 1.04%. The yield on the 30-year bond was quoted near the end of the session at 4.38% after opening at 4.29%.
Yesterday’s Municipal Market Data triple-A scale yielded 3.05% in 10 years and 3.74% in 20 years, following levels of 3.03% and 3.73%, respectively, Friday. The scale yielded 4.09% in 30 years yesterday, following Friday’s level of 4.08%.
As of Friday’s close, the triple-A muni scale in 10 years was at 87.3% of comparable Treasuries, and 30-year munis were 95.3% of comparable Treasuries, according to MMD. Also as of Friday’s close, 30-year tax-exempt triple-A rated general obligation bonds were at 97.4% of the comparable London Interbank Offered Rate.
The primary market should be fairly brisk this week as the new-issue calendar includes two deals in California each larger than $1 billion, a handful of Build America Bond issues, short-term notes, variable-rate bonds, and a generous helping of long-term essential-service issues.
In the primary market this week, California’s $3 billion of negotiated sales-tax backed economic recovery refunding bonds will dominate, based on its size and availability, and accounts for a substantial amount of the estimated $10.786 billion of new, long-term volume targeted for pricing by issuers this week, according to Ipreo LLC and The Bond Buyer. Last week, a revised $4.429 billion came to market, according to Thomson Reuters.
This week, the California sale consists of two series of refunding bonds and is expected to be offered to retail investors in a two-day retail order period today and tomorrow before Thursday’s planned official pricing by senior manager Barclays Capital.
The refunding ERBs recently received upgrades from all three major rating agencies in advance of the sale — to A1 by Moody’s Investors Service, to A-plus by Standard & Poor’s, and to A by Fitch Ratings. The preliminary structure includes $2.6 billion of fixed-rate Series 2009A bonds and $400 million of floating-rate Series 2009B bonds.
Other major California issuance includes a $1.3 billion revenue bond sale from the Bay Area Toll Authority, its first-ever BAB sale, as well as a $569 million revenue financing from the California Health Facilities Finance Authority on behalf of Catholic Healthcare West. Scheduled for pricing by Citi tomorrow, the taxable direct-pay BAB sale is structured with a final maturity in 2049, and contains make-whole calls. The deal is expected to be rated Aa3 by Moody’s, AA by Standard & Poor’s, and AA-minus by Fitch.
The health care offering, also planned for pricing by Citi tomorrow, consists of variable-rate health facility revenue bonds in three series, one of which will be issued through the Arizona Health Facilities Authority. The bonds are expected to carry ratings of A2 from Moody’s, A from Standard & Poor’s, and A-plus from Fitch, and are tentatively structured to mature serially from 2010 to 2025.
The New York City Municipal Water Finance Authority will sell as much as $723 million of water and sewer system second general resolution revenue bonds in a two-pronged negotiated deal being senior-managed and priced by Barclays. The deal has two components, the larger of which is fiscal 2010 Series AA, which includes $500 million of taxable direct-pay BABs scheduled for pricing today or tomorrow. Fiscal 2010 Series BB includes between $200 million and $223 million of traditional tax-exempt revenue refunding bonds. The bonds are expected to be rated Aa3 by Moody’s, AA-plus by Standard & Poor’s, and AA by Fitch.
In the new-issue market yesterday, JPMorgan priced for retail investors $322.9 million of revenue refunding bonds for the Harris County, Tex., Cultural Education Facilities Finance Corp. The bonds mature from 2010 through 2019, with term bonds in 2025 and 2031. Yields range from 1.70% with a 3% coupon in 2011 to 5.00% priced at par in 2025. Bonds maturing in 2010 will be decided via sealed bid. Bonds maturing in 2031 were not offered during the retail order period.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote: “Last week was important for the municipal market, for while challenges remain — two large state loans needed to be dramatically downsized and the California bond came with yields reminiscent of the second quarter — there was strong demand for the large calendar of health care paper.”
“Thus, we can now judge that the early-October 'correction’ was just that for most of the industry and not just for high-grade paper,” Fabian wrote. “Heading into the week, there had been some fear of more widespread outflows from high-yield funds that, in theory, could have forced related bond yields far higher. We do note that trading levels have continued to slump, as have average transaction size, implying a stronger reliance on individual investors. This will bolster the market’s reluctance to rally much below current yields and, should the Treasury market rally amid better-than-expected performance in this week’s huge auctions, tax-exempt underperformance may ensue.”
The economic calendar was light yesterday.
