Wary Traders, Investors Take Care of Business

The municipal market may be in an apprehensive mood regarding the debt and budget deadlock in Washington, but it still had business to attend to Wednesday.

And as legislators on Capitol Hill shouted and stomped, muni issuers and traders got down to the business of pricing some important new deals.

Investors, though, couldn’t help but scrutinize the day’s primary and secondary offerings with the debt-ceiling crisis looming over head. This led to middling interest in the secondary market, but decent appetite in the primary, a New York trader said.

“There was light to moderate activity in the secondary market, and more on the light side,” he said. “Most new-issue pricing was firm.”

The Municipal Market Data triple-A curve showed a divergence in trajectory. Short-term yields are steady to two basis points lower. Bonds maturing from 2020 to 2041 are one to two basis points higher.

The benchmark 10-year muni yield inched up one basis point to 2.69%. The 30-year yield rose two basis points to 4.37%. The two-year yield held steady at a calendar-year low of 0.40%.

Treasuries were mostly weaker Wednesday. The 10-year Treasury yield ended the day’s session two basis points higher at 2.98%. The two-year yield jumped five basis points to 0.45%. The 30-year yield held steady at 4.29%.

About $4.1 billion in new deals is expected this week, roughly half of last week’s supply. Issuers are hesitant to make a move into the market amid the uncertainty the debt-ceiling crisis has generated.

Bank of America Merrill Lynch won the week’s biggest deal onWednesday morning: a $418.3 million Maryland general obligation state and local facilities loan. The bonds are rated triple-A by the major rating agencies.

Yields range from 0.70% with a 5.00% coupon in 2014 to 3.638% with a 3.50% coupon in 2025. Credits maturing in 2015 through 2020, as well as in 2023, 2024, and 2026 were sold, but not available.

Investors have been following closely Maryland’s issues this week, which also included Monday’s negotiated sale of $100 million of GO bonds.

They want to know how they price, considering that Moody’s Investors Service last week placed Maryland and four other triple-A-rated states on review for a possible downgrade, shadowing the possible downgrade of the U.S. sovereign credit.

Wednesday’s competitive deal was originally slated for $600 million, which had included almost $200 million in refunded debt. But state officials decided earlier in the week to approach Wednesday’s offering differently and to lower the total expected to reach the market, according to Maryland Treasurer Nancy Kopp.

“We decided to defer the refunding part of the package because the savings were not great enough,” Kopp wrote in an e-mail. “The new-money competitive part — $418 million — just sold at a very low interest rate.”

The day’s results were very satisfying, Kopp added in a statement. Maryland’s triple-A-rated bonds drew “significant” interest and a “very favorable low interest rate,” she said.

MMD analyst Randy Smolik offered a broader appraisal. He said Maryland’s competitive GOs saw impressive business inside 10 years and on maximum-yield bonds, but they saw limited follow-through elsewhere.

“One thing was clear — where customers felt the safest was in short maturity structures,” Smolik wrote in his daily commentary. “At least if the U.S. credit downgrade and ripple effects remain an issue for years to come, investors can roll off purchases in relatively short time.”

In the negotiated market, Bank of America Merrill priced $281.4 million of Maine Health and Higher Educational Facilities Authority revenue bonds on behalf of the MaineGeneral Medical Center. The bonds are rated Baa3 by Moody’s and BBB-minus by Fitch Ratings.

Yields range from 3.45% with a 5.00% coupon in 2015 to 7.00% with coupons of 6.75% and 7.00% in a split maturity in 2041. Yield for maturities in the last five years of the curve firmed five basis points at repricing.

Jefferies & Co. priced $282.8 million of Texas Public Finance Authority taxable general obligation and refunding bonds. The bonds were rated triple-A by Moody’s and Fitch, and AA-plus by Standard & Poor’s.

Yields range from 0.716% with a 3.00% coupon in 2013 to 5.116% at par in 2031. Credits maturing in 2012 were not formally re-offered.

Stifel, Nicolaus & Co. priced $238.7 million of Columbus, Ohio, GO limited- and unlimited-tax bonds in two series. The bonds are rated triple-A by the major rating agencies.

Yields for the unlimited-tax series, at $181.9 million, range from 0.20% with a 2.00% coupon in 2012 to 3.92% with a 4.00% coupon in 2029. Yields for the limited-tax series, at $56.9 million, range from 0.20% with a 2.00% coupon in 2012 to 3.74% with a 3.625% coupon in 2027.

Yields at the in 2026 and 2027, in the unlimited-tax series, were a whopping six basis points higher in the institutional pricing.

The primary equities indexes took a pounding on the day. The Dow Jones Industrial Average lost almost 1.6%, falling by just under 200 points on the day. Nasdaq and the S&P 500 tumbled 2.65% and 2.03%, respectively.

The equities markets on Wednesday reacted to indications by the Congressional Budget Office that budget plans offered by Senate Democrats and House Republicans would not reduce the deficit sufficiently. This has raised fears that Washington appears incapable of reaching a compromise that resolves the U.S. debt crisis.

The developments also increase the probability of a downgrade of the nation’s sovereign credit.

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