Sizeable deals planned in New York, Louisiana, and Texas won't do much to relieve a drought in supply this week as volume is expected to fall below $3 billion on the heels of last week's oversubscribed Illinois deal and a second Puerto Rico downgrade.
The market seemed to take Friday's midday downgrade by Moody's Investors Service of Puerto Rico's general obligation bonds to speculative grade in stride and had a mostly muted reaction to Friday's unemployment numbers, which showed that the U.S. unemployment rate in January hit a five-year low of 6.6%.
On Friday, the generic, triple-A GO scale in 2044 ended at a 3.84%, according to Municipal Market Data.
"After the downgrade, from what I see the trades are marginally weaker, but nothing crazy yet," said one New York trader. "Some of the pieces are weaker, but they have recently been trading at downgraded levels anyway."
Moody's dropped Puerto Rico's general obligation rating two notches, to Ba2 from Baa3. Earlier in the week, Standard & Poor's cut the rating one level to BB-plus.
This week, the market will turn its focus to the supply shortage, the New York trader said. According to Ipreo LLC and The Bond Buyer, an estimated $2.65 billion is on tap, down from the revised $3.53 billion that came to market last week, according to Thomson Reuters.
"Supply is non-existent," the trader said. "If there is a large new issue, it will get some attention," describing demand for last week's $1 billion Illinois deal as "a riot."
The largest deal planned for this week is a two-pronged Louisiana GO sale that was will be priced in Tuesday's competitive market. The $347.1 million tax-exempt series is structured with serial bonds maturing from 2017 to 2034, while the $149.2 million taxable series matures from 2015 to 2020.
In the Northeast, the New York State Mortgage Agency will come to market with a three-pronged offering of revenue debt expected to be priced by Morgan Stanley on Wednesday following a retail order period on Tuesday.
The deal consists of $55.49 million of taxable debt, $59.94 million of tax-exempt bonds subject to the alternative minimum tax, and $63.64 million of non-AMT tax-exempt bonds.
Strong demand for individual bonds among retail and large individual investors has recently outweighed the availability of new supply, according to the New York trader.
For instance, in last week's market, the mammoth Illinois deal was oversubscribed when it was priced by Citi with 5% coupon bonds due in the final 2039 maturity with a 5.04% yield versus the generic, triple-A GO, which ended at a 3.75% at the time of pricing on Thursday, according to MMD.
The state sold $1.025 billion of the bonds, $25 million more than the expected $1 billion. It received $5.5 billion in orders from 109 individual investors, the state's assistant budget director said in a press release.
However, demand for municipal mutual funds recently shifted as weekly reporting funds ended a three-week period of inflows when Lipper FMI reported $227.3 million of net outflows late Thursday.
The outflows compared to $333.59 million of inflows reported by the funds in the week ended Jan. 29.
In one of the only other sizable deals planned for the negotiated market this week, Cypress-Fairbanks, Tex., will sell $159.32 million of school building bonds in a two-pronged deal. JPMorgan Securities will price the $117.36 million series, while Raymond James & Associates will price a $41.96 million series, which is Permanent School Fund-guaranteed.
