Whether steady demand for new issues will continue depends on how much interest investors can muster up for the low yields plaguing the market, which may go even lower if it rallies this week on the heels of the weaker-than-expected employment numbers, according to municipal participants.
In its announcement Friday, the Labor Department reported that in September there was only a net increase in non-farm payrolls of 96,000, much weaker than the 150,000 to 180,000 that was expected.
If the market believes the Labor data points to a slowing economy and rallies, pushing municipal prices higher, that could mean less retail participation in generic, plain-vanilla new issues, players noted.
Many mom-and-pop investors have already been hiding their heads in the sand to avoid the existing low rates.
Retail demand has been negligible over the last few weeks and longer, primarily based on how low rates have been, said Clark Wagner, chief executive officer and portfolio manager at First Investors Management Co. in New York City.
This week in what will be a four-day trading session cut short by Mondays Columbus Day observance there are a handful of sizable deals on the new-issue calendar that will test the markets appetite.
The activity will be led by a $450 million Clark County, Nev., School District general obligation sale with maturities from 2006 to 2024 that is scheduled for tomorrow in the competitive market.
While that deal is expected to do well based on the rapidly growing demographics of the county and its close proximity to Las Vegas, in general, new issues will have to offer some bells and whistles to attract yield-hungry retail investors in the current market climate, municipal players said.
The most sought-after deals will be those structured with the par or discount coupon bonds that mom individual investors prefer or those with attractive yields, which was the case with last weeks $1.4 billion New Jersey Economic Development Authority cigarette tax revenue offering.
Boasting yields that were substantially higher than the generic market, that deal was oversubscribed and was repriced by underwriters at Citigroup Global Markets Inc., with yields lowered between one and 25 basis points on certain maturities.
Wagner was one of many institutional investors who purchased bonds from the New Jersey deal. It looked attractive based on the yield for New Jersey paper, he said, adding that he viewed the deal as more of a tobacco credit than a tax-backed credit.
Although he has owned tobacco bonds in the past, this was the first time he has participated in such a deal in a while, he said.
In general, Wagner said negotiated and competitive deals are finding buyers, but the demand all depends on having the right structure and price, such as the New Jersey EDA deal. Its a function of underwriters pricing them to meet the interest, he said.
For the right issue, retail is probably still motivated to add municipals to their portfolios, agreed Tom Spalding, senior portfolio manager at Nuveen Investments in Chicago, who manages 13 national funds totaling $12 billion.
Retail investors participated in the New Jersey deal, he said, because of its attractive yield pickup over plain-vanilla paper based on its lower investment-grade ratings and similarities to the tobacco sector.
While the bonds are rated Baa2 by Moodys Investors Service, and BBB by Standard & Poors and Fitch Ratings, some of the maturities were insured.
The final, uninsured term bond due in 2034 carried a 5 3/4 coupon and was priced to yield 5.93% 120 basis points more in yield than the 30-year generic triple-A GO bond tracked by Municipal Market Data at the time.
This week, only a Northeast hospital deal could have some extra yield that will appeal to retail and institutional investors if some or all of the triple-B rated bonds come uninsured.
The rest of the deals in the holiday-shortened week will be significantly smaller than last weeks New Jersey EDA deal and will have substantially less yield.
Besides the Nevada offering, tomorrow will also see the Los Angeles Metropolitan Transportation Authority in the competitive market.
Sporting an upgrade from Fitch to A-plus from A based on its high debt service coverage, the authority will sell $183.6 million of revenue debt maturing from 2005 to 2034. The bonds are also rated A1 by Moodys and A-plus by Standard & Poors.
A $149.3 million Virginia Public School Authority GO sale is scheduled for competitive pricing on Thursday in a deal that matures from 2005 to 2029.
The negotiated sector, meanwhile, includes a pair of hospital offerings, as well as a sizable water deal in the Southwest, and a large GO refunding deal in the Northeast.
The University of New Mexico Board of Regents will sell $191 million of hospital mortgage revenue bonds tomorrow in a deal being priced by J.P. Morgan Securities Inc. on behalf of the states only childrens hospital.
The deal contains serial bonds that mature from 2008 to 2019 and term bonds in 2024 and 2032, and will finance a comprehensive expansion project at the University of New Mexico Childrens Hospital.
The bonds are insured by Financial Security Assurance Inc., and have mortgage insurance from the Federal Housing Administration. They are secured by hospital revenues and the project will receive a $40 million contribution from the state out of proceeds from prior cigarette tax revenue bond issues.
Also in the hospital sector, Catholic Health Services of Long Island Obligated Group will enter the market with a $100 million revenue sale on behalf of St. Francis Hospital.
Issued through the New York State Dormitory Authority, the deal will be priced on Thursday by senior managed Goldman, Sachs & Co.
The bonds are rated Baa1 by Moodys, BBB by Standard & Poors, and BBB-plus by Fitch. They will mature from 2007 to 2014 and will feature term bonds in 2021, 2027, and 2034.
In the essential service sector, the Oklahoma Water Resources Board tomorrow will sell $203.1 million of natural triple-A state revolving fund revenue bonds maturing from 2006 to 2027 in a negotiated deal senior-managed by UBS Financial Services Inc.
Meanwhile, back in New Jersey, this week Jersey City will come to market with a $128 million GO refunding issue that has four series of bonds, two of which are tax-exempt and two of which are taxable.
The bonds are insured by MBIA Insurance Corp. and will be priced by Wachovia Bank NA tomorrow.
The tax-exempt portions are the $70 million Series A, maturing from 2005 to 2020, and the $29 million Series C, maturing from 2005 to 2021. The taxable portions are the $12 million Series B, maturing from 2005 to 2014, and the $17 million Series D, maturing from 2005 to 2020.