The municipal market was unchanged Monday as participants returned from a long holiday weekend to a lightly traded secondary with $11.27 billion of issuance in the primary slated for later this week.
“There’s not a whole lot happening right now,” a trader in New York said. “It’s a quiet start to the week. There’s very little trading at this point, and we’re just flat for the most part.”
The Municipal Market Data triple-A scale yielded 2.82% in 10 years Monday, unchanged from Friday, while the 20-year scale held steady at 3.97%. The scale for 30-year debt remained flat at 4.31% Monday.
“This figures to be a pretty busy week, but that wasn’t really the case today,” a trader in Los Angeles said. “Secondary trading was pretty light and people were just sort of easing themselves back from the holiday. I’d call it unchanged on the day, and we’ll see where things go the rest of the week.”
Monday’s triple-A muni scale in 10 years was at 99.6% of comparable Treasuries and 30-year munis were at 103.6%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 111.9% of the comparable London Interbank Offered Rate.
The Treasury market was mostly firmer Monday. The benchmark 10-year note finished at 2.84% after opening at 2.87%, the 30-year bond strengthened to 4.16% from 4.21%, and the two-year note rose a basis point to 0.52%.
Issuers in the Midwest and Northeast are expected to serve up a meaty $11.27 billion of post-holiday fare in the municipal market this week, according to Ipreo LLC and The Bond Buyer, as they look to take advantage of last week’s firmness following recent supply and pricing volatility.
A revised $2.58 billion came to market last week, according to Thomson Reuters, as $3.1 billion left municipal bond mutual funds. The highest redemptions in at least a decade caused net-asset values to drop more than $11 billion, according to data from Lipper FMI.
The redemptions came as growing investor fears over volatility — spurred by a glut of new supply arriving the previous week — sparked a sell-off that caused bonds to weaken by as much as 20 basis points on the long end before regaining ground.
This week, the Illinois Railsplitter Tobacco Settlement Authority will sell $1.4 billion of tobacco revenue bonds after the market was jolted by negative credit action two weeks ago. Standard & Poor’s downgraded 51 ratings for 16 tobacco settlement securitizations, mostly into junk territory from BBB, with the assumption that most structures could not withstand forecast declines in future cigarette consumption.
The upcoming Citi-led Illinois deal received Fitch Ratings’ highest tobacco rating of BBB-plus, while Standard & Poor’s rates the serial bonds A and the term bonds A-minus. The higher ratings for this issue are due at least in part to the deal’s structure. It includes a 17-year final maturity and debt-service coverage levels that ensure adequate revenue to repay investors even against a 10% drop in tobacco consumption.
The deal is expected to price Wednesday after a retail order period on Monday and Tuesday. It is structured to mature from 2012 to 2021 with term bonds in 2024 and 2027.
In Monday’s retail pricing, yields ranged from 2.25% with a 3% coupon in 2012 to 6.25% priced at par in 2027. Bonds maturing in 2024 were not offered during the retail order period.
Last week, the tobacco bond market witnessed forced selling from select high-yield municipal bond mutual funds and levered investors after the downgrades, which affected bonds with a face value of $22 billion.
The Northeast activity will be led Wednesday by a $1.1 billion sale of state personal income tax bonds from the New York State Urban Development Corp., issued as traditional taxable Build America Bonds and tax-exempt securities. The deal is structured to include $349.3 million of Series 2010C BABs and $328.3 million of traditional Series B taxable bonds, both of which are slated to be priced by Citi. Morgan Stanley is pricing an additional $427.1 million of Series 2010A general purpose tax-exempt paper. The issuer on those bonds is the related Empire State Development Corp.
The UDC’s PIT bonds are expected to be rated AAA by Standard & Poor’s and AA-minus by Fitch.
By contrast, an $840 million sale of special-project senior terminal revenue bonds for John F. Kennedy International Airport from the Port Authority of New York and New Jersey will likely offer relatively attractive yields due to mixed ratings of triple-B minus from Moody’s Investors Service and Standard & Poor’s, and BB from Fitch. Citi is expected to price the offering Tuesday.
A $667.4 million offering from Ohio’s American Municipal Power Inc. will enter the market on Wednesday when Wells Fargo Securities prices the taxable and tax-exempt Series 4 revenue bonds.
The region’s activity will also include a $502.2 million Chicago GO sale structured as Series 2010B taxable BABs, and Series C traditional taxable project bonds. Both will be priced by Loop Capital Markets LLC and are rated Aa3 by Moody’s, A-plus by Standard & Poor’s, and AA-minus by Fitch.
The Los Angeles Department of Water and Power will make its second appearance in as many weeks Tuesday when it sells $492.7 million of water system revenue bonds structured as taxable BABs in a deal slated to be priced by joint managers JPMorgan and Siebert Brandford Shank & Co. This follows a $760.2 million BAB issuance last week.
The bonds are rated Aa2 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch.
In the new-issue market Monday, the Orange County, Calif., Sanitation District competitively sold $157 million of taxable BABs to Barclays Capital.
The BABs mature in 2032 and 2040. Bonds maturing in 2044 yield 6.28% with a 6.4% coupon, or 4.08% after the 35% federal subsidy. Bonds maturing in 2032 were not formally re-offered.
The bonds, which were priced to yield 210 basis points over the 30-year Treasury yield, contain a make-whole call at Treasuries plus 30 basis points. The credit is rated AAA by both Standard & Poor’s and Fitch.
