Municipals continue to firm; yields may be following interest rates, S&P analyst says

By Sheri Kasprzak

New York, Feb. 25 - Municipals closed out a strong week on a firmer note, and the best performance was seen in intermediate bonds out to about 20 years, market insiders noted. It was just another day of improvement for the market, which has rallied all week.

But the recent improvement in the market caused one bond analyst to question whether munis are truly rallying or merely following interest rates.

"The municipal bond market has been buffeted by bond fund outflows and vastly differing perspectives on the prospects for municipal defaults, and both are high profile pressures on the market," wrote J.R. Rieger, vice president of fixed income indexes at Standard & Poor's.

Rates are down, supply is low

"But muni bond prices are up. Slower supply of new issues and interest rates coming down may be the underlying factors pushing municipal bonds back up. From the end of January, the 10-year Treasury bond yield is down about 2 bps and the 30-year yield is down about 13 bps, so interest rates are lower."

Rieger noted that the S&P National AMT-Free Municipal Bond index, which follows investment-grade tax-exempt bonds, has seen its weighted average yield fall by 10 basis points so far this month to 4.02%.

"This has resulted in a positive return of about 1.5% for the month," he said.

"But let's look at that yield again. A 4.02% tax-exempt yield has a taxable equivalent yield of 6.18% at a 35% tax rate. That 6.18% tax-exempt yield is still cheaper than many BBB corporate bond yields of similar structure."

Yields firmer Friday

Back to Friday's action, one trader reached during the session said intermediate bonds to about 20 years were seeing the most improvement. Their yields were better by 1 to 5 bps. Short bonds and very long bonds were flat to better by 1 to 2 bps, the trader noted.

"It's been a fairly quiet day in terms of trading," he said. "About what you'd expect for a Friday."

Maryland preps G.O. bonds

Looking to upcoming offerings, the State of Maryland announced plans Friday to sell $485 million of series 2011 general obligation bonds (Aaa/AAA/AAA) on March 9.

The offering includes $100 million of tax-exempt first series A bonds, which will be sold on a negotiated basis, as well as $378.48 million of tax-exempt first series B bonds and $6.52 million of taxable first series C qualified energy conservation bonds, which will be sold competitively, said a preliminary official statement.

Siebert Brandford Shank & Co. LLC is the senior manager for the series A bonds.

Public Financial Management Inc. is the financial adviser for the series B and series C bonds.

Proceeds will be used to fund various capital projects, capital grants for local governments and matching fund loans and grants for local governments, nonprofits, hospitals and other entities. The proceeds from the first series C bonds will be used to assist local educational facilities undertake energy conservation projects in schools.

Michigan Finance to price

Also coming up, the Michigan Finance Authority is expected to price $231 million of series 2011 state aid revenue notes for the School District of the City of Detroit, said a preliminary official statement.

The offering includes $75 million of series 2011A-1 notes and $156 million of series 2011A-2 notes.

The notes will be sold through senior managers J.P. Morgan Securities LLC and Siebert Brandford Shank & Co. LLC.

The 2011A-1 notes are due Feb. 20, 2012, and the 2011A-2 notes are due March 20, 2012.

Proceeds will be used to purchase notes to be issued by the school district.

Based in Lansing, the authority provides funding for a variety of public projects.

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