The municipal market opened the holiday-shortened week unchanged to slightly firmer yesterday in light trading activity."It's quiet, but there's a bit of firmness out there," a trader in New York said. "You could call it unchanged and really not be wrong, but it definitely feels a little bit firmer. I'd say we're maybe flat to better by a basis point, in spots, at most."
"It feels a little bit better, but there's just not a lot of activity," a trader in Los Angeles said. "I'd be hard pressed to call it better by more than a basis point, but there's a firmer tone."
The Treasury market showed some gains yesterday. The yield on the benchmark 10-year note, which opened at 3.54%, was quoted near the end of the session at 3.48%. The yield on the two-year note was quoted near the end of the session at 1.11% after opening at 1.12%. The yield on the 30-year bond, which opened at 4.34%, was quoted near the end of the session at 4.30%.
As of Friday's close, the triple-A muni scale in 10 years was at 92.9% of comparable Treasuries, according to Municipal Market Data. Additionally, 30-year munis were 108.8% of comparable Treasuries. Also, as of Friday's close, 30-year tax-exempt triple-A rated general obligation bonds were at 114.4% of the comparable London Interbank Offered Rate.
After accommodating some heavy June volume, the municipal market could see its first dose of summer doldrums this week as a pair of airport revenue offerings are priced amid a relatively light calendar, estimated at $1.97 billion, of primary market offerings ahead of the July 4 holiday, according to Ipreo LLC and The Bond Buyer.
"It's been pretty quiet out on the Street, but it's to be expected, starting off a holiday week," a trader in New Jersey said. "There's not a lot on the new-issue market this week, and I think people are more or less content to sit on the sidelines for the most part this week."
The volume pales in comparison to the revised $3.43 billion that entered the market last week and $6.91 billion the week before, according to Thomson Reuters. Despite the lack of supply that usually accompanies the arrival of summer, volume has been robust in recent weeks as issuers rush to sell a significant amount of taxable Build America Bonds in addition to their tax-exempt deals. Since the federal BAB program was enacted by the stimulus law in February, municipal issuers have issued more than $12.5 billion of BAB debt, according to Thomson.
Orange County, Calif., and St. Louis will each bring two airport deals to market this week. However, combined, they amount to significantly less than last week's single largest deal - $808.6 million of personal income tax revenue bonds from the Dormitory Authority of the State of New York.
The $235.7 million California deal, being sold on behalf of John Wayne Airport to finance the addition of terminal space, six new gates, and parking facilities, is expected to be priced today by Citi. The fixed-rate, senior-lien bonds are structured to mature from 2010 to 2019 with term bonds in 2024, 2029, and 2039, and are rated Aa3 by Moody's Investors Service, and AA-minus by Fitch Ratings. The deal will also sport a new upgrade from Standard & Poor's to AA-minus from A-plus, which was announced two weeks ago in advance of the sale.
In the new-issue market yesterday, Morgan Stanley priced $82 million of revenue bonds for the California Educational Facilities Authority. The bonds mature in 2024, yielding 4.25% with a 5.25% coupon, and are not callable. The credit is rated Aa1 by Moody's and AA-plus by Standard & Poor's.
Springfield, Ill., School District No. 186 competitively sold $25 million of taxable GO limited-tax BABs to Robert W. Baird & Co. with a true interest cost of 4.14%. The bonds mature from 2012 through 2018, with yields ranging from 2.70% with a 2.9% coupon in 2012 to 4.75% with a 5% coupon in 2018, and coupons ranging from 1.89% in 2012 to 3.25% in 2018 after the 35% federal subsidy. The bonds, which are not callable, are rated AA-minus by Standard & Poor's.
In a weekly report, Morgan Stanley Smith Barney's George Friedlander wrote that "the [BAB] market has become a key component of the financing structure for state and local governments. In the meantime, however, it has generated confusion among market participants about its role, its target audience, and it's ultimate relationship to traditional tax-exempts"
Friedlander wrote that, for example, "many revenue bond issuers find that BAB subsidies sit awkwardly under existing bond resolutions."
"In some cases, the BAB subsidy is not considered revenue of the issuer, so that it is not available to help the issuer meet tests as to debt service coverage or additional bonds tests," he wrote. "In other cases, while it may be considered revenue of the issuer, the borrowing cost under various coverage calculations does not take the subsidy into account, so, for example, a 7.00% gross borrowing cost, pre-subsidy, would fully affect calculations as to debt service reserves, maximum annual debt service, or additional bonds that can be issued. We expect the latter concern to subside over time as bond documents for new issuers are written, but we don't expect them to disappear entirely."
"A lot of questionable comparisons are being thrown around, in our view, about the relative credit strength of munis and corporates," Friedlander continued.
"There is no question that munis have been under-rated, historically, relative to their corporate counterparts," he wrote. "The bigger question, however, relates to how muni credits will fare - in terms of defaults, but more importantly in terms of downgradings - as we move through this extraordinarily difficult period for state and local budgets. In terms of these concerns, we are not suggesting a sharp increase in defaults, merely more than in the past, but also note that investors in corporate bonds are used to the type of disclosure required for corporate issuer by the SEC, which is by no means as stringently adhered to by state and local issuers."
Trades reported by the Municipal Securities Rulemaking Board yesterday showed some gains. A dealer sold to a customer Puerto Rico Sales Tax Financing Corp. 6.375s of 2039 at 6.00%, one basis point lower than where they traded Friday. A dealer bought from a customer New Jersey Health Care Facilities Financing Authority 5.25s of 2024 at 5.45%, even with where they were sold Friday. A dealer sold to a customer taxable Florida Department of Transportation 6.8s of 2039 at 6.76%, down one basis point from where they traded Friday. Bonds from an interdealer trade of insured Utah Transportation Authority 5s of 2036 at 5.06%, one basis point lower from where they were sold Friday.
The economic calendar was light yesterday.
