The municipal market was mostly unchanged yesterday amid fairly light trading activity in the secondary.
“We’re off to a bit of a slow start,” a trader in New York said. “There isn’t really much movement to this point, and not a whole lot trading. I’d just call it pretty flat and quiet.”
“There is some weakness here and there, mostly inside of 10 years,” a trader in Los Angeles said. “Longer than that, though, it’s pretty well unchanged. Either way, there’s not a ton trading.”
The Treasury market showed some gains yesterday. The benchmark 10-year note was quoted near the end of the session with a yield of 3.66% after opening at 3.69%. The yield on the two-year was quoted near the end of the session at 0.98% after opening at 0.99%. The yield on the 30-year bond was quoted near the end of the session at 4.58% after opening at 4.59%.
The Municipal Market Data triple-A scale yielded 2.85% in 10 years and 3.78% in 20 years yesterday, following Friday’s levels of 2.84% and 3.78%. The scale yielded 4.15% in 30 years yesterday, matching Friday.
Friday’s triple-A muni scale in 10 years was at 77.0% of comparable Treasuries and 30-year munis were at 90.6%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 94.5% of the comparable London Interbank Offered Rate.
In the new-issue market, there will be several significantly sized offerings this week, including a pair of $2 billion financings — one from California and the other from an issuer in Florida — that will join other large deals in the primary.
An estimated $10.6 billion in new, long-term volume, is expected this week, according to Ipreo LLC and The Bond Buyer. The lofty estimate is more than double the revised $5.13 billion in new volume that was priced last week, according to Thomson Reuters.
California and Florida’s Citizens Property Insurance Corp. will head up activity, each with a $2 billion sale.
California’s general obligation deal is being senior-managed by Bank of America Merrill Lynch. It is expected to be rated Baa1 by Moody’s Investors Service, AA-minus by Standard & Poor’s, and BBB by Fitch Ratings.
The $2 billion CPIC financing will be priced by JPMorgan and Goldman, Sachs & Co. today. It will consist of high-risk account senior-secured bonds that are rated A2 by Moody’s and A-plus by Standard & Poor’s.
The deal is divided into four series of bonds and includes short-term notes and floating-rate notes.
The debt is being issued to provide resources to help Citizens meet its potential claims-paying needs for the 2010 hurricane season.
Meanwhile, the Los Angeles Department of Airports is planning to bring $897.8 million of senior revenue bonds that will be priced by book-runner Siebert Brandford Shank & Co. tomorrow.
The debt is rated Aa3 by Moody’s and AA by Standard & Poor’s and Fitch. It is secured by a first lien on pledged revenue and is being sold on behalf of the city-operated Los Angeles International Airport to pay or reimburse the department for capital expenditures incurred at LAX.
Proceeds will be spent on terminal projects, as well as to refund certain subordinate commercial paper notes, to make a deposit to the senior revenue fund, to fund a portion of interest on the 2010A bonds, and to pay costs of issuance, according to preliminary official statement.
The Puerto Rico Electric Power Authority is readying an $850 million revenue bond sale, which is expected to be priced by JPMorgan on Thursday with a tentative structure that includes bonds maturing from 2032 to 2040.
The bonds are rated A3 by Moody’s and BBB-plus by Standard & Poor’s and Fitch. They are secured by net revenue of PREPA’s electric generation, transmission, and distribution system, and are being issued to repay lines of credit from certain private banks and the Government Development Bank of Puerto Rico that used to finance certain capital improvements and for corporate purposes.
The bonds come to market as the authority struggles to increase its net revenue and avoid declines in electric energy sales revenue that have been problematic in the recent past.
Yesterday, Morgan Stanley priced for retail investors $216.8 million of wastewater and drinking water revolving fund revenue bonds for the Kentucky Infrastructure Authority.
The bonds mature from 2011 through 2029, with yields ranging from 0.70% with a 3% coupon in 2012 to 4.10% with a 4% coupon in 2029.
Bonds maturing in 2011 were decided via sealed bid.
The bonds, which are callable at par in 2020, are rated triple-A by all three major rating agencies.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote “the municipal market continues to defy mean reversion, although last week modest spread widening did occur as the Treasury market unspooled some pricing strength up front and as opportunistic institutional holders took a chance to realize some gains.”
“Still, the net effect was very limited and tax-exempts outperformed a flattening Treasury curve,” Fabian wrote.
“There are still more things at work in our sector’s favor. First, Moody’s has finally unveiled its plan to recalibrate municipal ratings to the global scale, meaning systemically higher ratings for general obligation and other governmental type issuers. This is a sweeping rebuke to the growing media chorus of doom for our sector; financial and economic pressures are undeniable, but the immediate threat to bondholders is manageable.
“In our opinion, the net effect is a curve flattener, with diluted high grade scarcity allowing yields to rise slightly up front, but greater BAB penetration exacerbating supply pressures at the long end,” Fabian continued.
“Regarding funds, ETFs may be the winners versus traditional mutual funds that more heavily depend on the apparent virtues of credit diversification. Of course, credit risk will continue to build for both public and corporate sector issuers in the long term. Second, the new health care bill establishes a 3.8% tax on investment earnings but excludes municipal bonds — one more reason why investors will be reluctant to sell their munis right now.”
The economic calendar was light yesterday.