Munis keep rallying; yields better by 8 bps in spots; munis still underperform vs. Treasuries

By Sheri Kasprzak

New York, April 15 - Municipal yields were better for the fourth straight session, this time by as much as 8 basis points in the intermediate portion of the yield curve, traders said Friday.

"Better all around, but at 10 years, there's a real rally," said one trader.

"Yields are down by 8 bps. Elsewhere, you're looking at anywhere from 3 to 5 bps. It's like the light at the end of the tunnel. The perfect ending to a good week."

Although there was plenty of cause for celebration, J.R. Rieger, vice president of fixed-income indexes at Standard & Poor's, cautioned Friday that yields have improved, but not as much as Treasuries.

"Municipal bond yields have improved or come down this week, offsetting a weaker start to April, but still have ended slightly cheaper than where they started the month," Rieger said Friday.

"Shorter-term bonds have improved the most, with bonds in the five-year maturity range having seen the biggest shift, an improvement from March 31 of 7 bps."

Outflows subside

Remo di Re, senior municipal bond credit strategist with RBC Capital Markets LLC, said in a report released Friday that outflows in municipal mutual funds continued to subside throughout March, but outflows did continue.

"Yields on the long end were not impacted as strongly as in previous months," di Re wrote.

"The yields on the 30-year equivalent triple-A municipal bond continued to hover right around 5%, while the 30-year Treasury was in the 4.40% range."

Di Re noted that issuers have continued to hold off from coming to market with new issues because "the number of larger dominant deals remained scarce, causing less volatility in municipal yields."

He wrote that this March bucked the trend of high issuance typically seen in that month.

"The municipal bond market experienced some continued volatility throughout the month as yields weakened toward the end of the month," he wrote.

"Our market will continue to be driven by supply and demand as we move forward into the second quarter. Retail investors should continue to see value in purchasing municipal bonds, but the question going forward and still yet to be determined is whether there will be enough buyers to meet a potential increase in supply."

Calendar remains light

A sudden surge in supply is unlikely for the week ahead, with primary action expected to be rather light. Even so, Alan Schankel, managing director with Janney Montgomery Scott LLC, said Friday that visible supply might be low, but big things might be on the horizon.

"A light new issue calendar helps, and although visible supply remains low, shadow supply may be building," he said Friday.

"The Illinois governor is negotiating with state legislators over a proposed $8.75 billion bond issue, an amount approximating the backlog of unpaid bills in the state Treasurer's inbox. Looking back in history at the largest muni deals, Illinois holds the record with a 2003 $10 billion taxable issue for pension funding, so if this deal makes it to market, it will be the second-largest in municipal history. Illinois and California issued nine out of the 10 largest deals."

Broad Institute deal ahead

Looking to coming offerings, the Massachusetts Development Finance Agency announced plans on Friday to price $353.54 million of series 2011 revenue bonds for the Broad Institute. Pricing is expected in early May.

The offering includes $269.995 million of series 2011A bonds and $83.545 million of series 2011B taxable bonds, said a preliminary official statement.

The bonds (A1/AA-/) will be sold on a negotiated basis with Morgan Stanley & Co. Inc. as the senior manager.

The 2011A bonds are due 2020 to 2026 with term bonds due 2031 and 2041. The 2011B bonds are due 2012 to 2020.

Proceeds will be used to construct, equip and acquire a 12-story laboratory building adjacent to and above a garage currently owned by a third party in Cambridge, Mass.

The Boston-based agency provides funding to educational, health-care and nonprofit organizations. The Broad Institute, based in Cambridge, is a research institute focused on genomics and bioinformatics.

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