The municipal market was unchanged with a slightly firmer tone Monday, amid fairly light secondary trading activity to open the week.
“It’s very quiet and very unchanged,” a New York trader said. “We are not doing anything much, it is as quiet as it can get — extremely inactive. I don’t expect a ton to go on this week, but you never know.”
The New Yorker said the summer is typically quiet.
A Los Angeles trader echoed that sentiment when he described the session as a “quiet Monday” and noted that the market feels firm, even though there’s no major trading taking place.
“Secondary prices seem to be stable and the bid side is firm,” the Los Angeles trader said. “The market is [probably] trying to look for a cue from the Treasury market, based on how the auction goes this week. The scale may be unchanged at this point.”
The Treasury market showed some losses Monday. The benchmark 10-year note was quoted near the end of the session at 3.06%, after opening at 3.05%. The 30-year bond finished at 4.05% after opening at 4.04%. The two-year note was quoted near the end of the session at 0.66% after opening at 0.62%.
The Municipal Market Data triple-A scale yielded 2.66% in 10 years and 3.70% in 20 years yesterday, following levels of 2.67% and 3.70% Friday. The scale yielded 3.99% in 30 years yesterday, matching Friday.
Friday’s triple-A muni scale in 10 years was at 87.5% of comparable Treasuries and 30-year munis were at 98.8%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 104.2% of the comparable London Interbank Offered Rate.
A $1.5 billion GO sale from the Los Angeles Community College District shares the primary spotlight this week with $900 million of taxable Build America Bonds from Illinois, which are expected to price tomorrow after a two-week delay.
The week’s two largest deals are part of an estimated $5.63 billion in new, long-term volume, according to Ipreo LLC and The Bond Buyer.
The Los Angeles college deal will be priced Thursday in two series — $875 million of BABs led by Citi, as well as $175 million of tax-exempt GOs priced by Morgan Stanley.
The bonds are rated Aa1 by Moody’s Investors Service and AA by Standard & Poor’s.
Proceeds will be used to finance capital projects at the district’s headquarters, nine main campuses, and satellite locations. They also will pay the costs of financing and prepay $300 million of bond anticipation notes issued June 15.
The Illinois deal is planned for pricing tomorrow by Citi, two weeks after state officials sidelined it while the fiscal 2011 budget was being signed and implemented.
The financing will arrive amid ongoing fiscal stress for the state, which drafted a budget with $1.4 billion in proposed spending cuts.
Illinois ended fiscal 2010 with 6.9% less sales taxes revenue and a 9.7% decline in income taxes. It has one of the nation’s lowest GO ratings.
The bonds, originally set to price the week of June 28, are rated A1 by Moody’s and A-plus by Standard & Poor’s and Fitch Ratings. The deal is structured with serial bonds maturing from 2011 to 2015 and term bonds in 2022 and 2035.
Two of the week’s other sizable deals hail from Washington, where the Port of Seattle plans to sell nearly $400 million of revenue refunding bonds, and from Arizona, where the Water Infrastructure Financing Authority will sell $239 million of water quality bonds. Both deals are being senior managed by Morgan Stanley.
The three-pronged Port of Seattle deal consists of $136 million of private-activity revenue bonds subject to the alternative minimum tax; $233.2 million of revenue and refunding private-activity non-AMT bonds; and $25.2 million of non-AMT, governmental revenue and refunding bonds. The debt is rated Aa3 by Moody’s and A-plus by Standard & Poor’s.
Proceeds will pay or reimburse costs of capital improvements to airport facilities, refund certain outstanding port bonds, make a deposit to a reserve account, and pay the costs of issuance.
The Arizona deal is rated triple-A by all three rating agencies and structured to include $139 million of water quality revenue bonds and $100 million of water quality revenue refunding bonds.
Alan Schankel, managing director at Janney Capital Markets, said in a written commentary that BABs have faced some challenges in recent weeks with spreads — BABs yield minus Treasury yield — which have risen to the highest level since Barclays began tracking BABs as part of their series of benchmark indexes. The challenges have occurred despite absolute and relative improvements in the levels of tax free bonds, he wrote.
“It’s interesting to note that although spreads are growing, absolute yields have been relatively stable in the past few months,” Schankel wrote. “Potential purchasers of BABs differ from those for tax-free bonds. Tax-free demand comes largely from individual investors and mutual funds owned primarily by individual investors, with these two segments comprising more than fifty percent of holders of municipal bonds. BABs on the other hand are held by more institutional accounts such as insurance companies and pension funds and many of these investors are not U S entities.”
Schankel said that he expects spreads to narrow in the coming months as municipal credit concerns diminish.
“Taxable municipals, primarily BABs, are equal to about 9.4% of the Barclays Long Credit Index, which is otherwise comprised primarily of corporate bonds,” Schankel wrote. “This is up from 4.79% a year ago and well below Barclays’ projection of 17.25% share by year end.”
Most institutional investors track their performance by measuring results against indexes or other benchmarks, Schankel wrote, with Barclays indexes being dominant in the fixed-income part of the investment universe.
“As the BABs’ share of the index grows, institutional investors will be pressured to add to their BABs positions so they can more closely track the benchmarks, creating continued demand for Build America Bonds,” he wrote.
The economic calendar was light yesterday.
Priti Patnaik contributed to this column.