Munis Unchanged to Slightly Firmer

20081103mcivw1a4-1-scarchilli-michael.jpg

The municipal market was unchanged to slightly firmer yesterday.

"There's a little bit of firmness, but not much. Probably not enough to move the scale even," a trader in Los Angeles said. "But the tone is firmer. In some spots, maybe we're better a basis point or two. But I'd call it unchanged overall."

Trades reported by the Municipal Securities Rulemaking Board yesterday were flat to slightly firmer. A dealer sold to a customer California 4.5s of 2026 at 5.45%, even with where they were sold Friday. A dealer sold to a customer New York's Long Island Power Authority 5.75s of 2033 at 6.08%, even with where they traded Friday. A dealer sold to a customer Florida Housing Finance Corp. 5s of 2035 at 5.36%, even with where they were sold Friday. A dealer sold to a customer Port Authority of New York and New Jersey 5s of 2025 at 5.20%, two basis points lower than where they traded Friday.

The Treasury market showed some gains yesterday, except on the long end, where it showed little movement. The yield on the benchmark 10-year Treasury note, which opened at 3.96%, finished at 3.91%. The yield on the two-year note was quoted near the end of the session at 1.44% after opening at 1.56%. And the yield on the 30-year bond, which opened at 4.33%, finished at the same level.

In economic data released yesterday, spending on construction projects fell 0.3% to a seasonally adjusted annual rate of $1.060 trillion in September as private construction increased 0.1%, and public construction slid 1.3%. The overall decrease, which was smaller than the 0.8% decrease projected by Thomson Reuters, and followed a revised August level of $1.064 trillion, up 0.3% from the prior month.

According to the Institute for Supply Management's monthly report on business, the ISM index dipped to 38.9 in October from 43.5 in September. Economists polled by Thomson Reuters predicted the index would slip to 41.5.

In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, wrote that "one of the key patterns over the past few weeks has been continuing pressure on the high-yield municipal sector."

"What may not be clear to investors, in our view, is that the sector called 'high yield' in the municipal market is different from that termed high yield in taxable space," Friedlander wrote. "In the taxable market, the high-yield sector comprises corporate bonds with ratings below investment grade, although it can also include split-rated bonds with an investment-grade rating from some rating agencies but not others. In the muni market, a large proportion of issues called 'high yield' are not below investment grade."

However, he wrote, as high-yield bond funds have come under pressure and had to sell bonds to meet liquidations, a pattern has developed that is not unusual in the bond markets of late: "some of the first bonds that were put up for sale were the strongest, not the weakest credits, because these are the ones that would attract the strongest bids from investors."

"As a consequence, yields on much of this paper have stayed elevated, even as the overall muni market rallied sharply from recent peak yields," Friedlander wrote. "Retail offering yields in the secondary market on double-A rated hospitals, for example, exceed 6.30% in the general market, and somewhat higher, when a new issue is in the market. For non-AMT, double-A state single-family housing issues, the yield is in excess of 6.50% in the general market."

The municipal market will see a slight decline in new-issue volume this week as some issues remain postponed due to unsettled market conditions, and as some issuers await the Election Day outcome of an estimated $66 billion of bond referendums before proceeding with their deals.

Combined volume this week is estimated to be $3.53 billion, down noticeably from last week's revised $5.27 billion, according to Thomson New volume includes $3.36 billion of negotiated sales versus $4.45 billion last week, and $173 million of competitive sales versus $820 million last week.

The largest deal of the week is expected to take place in the Northeast, a $664 million sale of service contract revenue bonds from New York's Empire State Development Corp. The deal is anticipated for pricing tomorrow by Merrill Lynch & Co. The offering consists of two series of bonds estimated at $332 million each, both structured to mature serially from 2012 to 2028. The bonds are rated AA-minus by Standard & Poor's and A-plus by Fitch Ratings.

In the new-issue market yesterday, Merrill priced $150 million of general obligation capital improvement bonds for New Hampshire. The bonds mature from 2010 through 2025, with a term bond in 2028. Yields range from 2.53% with a 4% coupon in 2010 to 5.11% with a 5% coupon in 2028. The bonds, which are callable at par in 2018, are rated Aa2 by Moody's Investors Service and AA by both Standard & Poor's and Fitch.

RBC Capital Markets priced $35.7 million of bonds for Grand Prairie, Tex., in two series. Bonds from a $9 million series of GOs mature from 2010 through 2029, with yields ranging from 2.95% with a 4% coupon in 2010 to 5.60% with a 5.5% coupon in 2029. Bonds from a $26.7 million series of certificates of obligation also mature from 2010 through 2029, with yields ranging from 2.95% with a 4% coupon in 2010 to 5.60% with a 5.5% coupon in 2029. All bonds are callable at par in 2018. The credit is rated AA-plus by Standard & Poor's and AA by Fitch.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER