Rally continues even as new supply hits market; Commonwealth Transportation brings $600 million

By Sheri Kasprzak

New York, May 11 - Municipals continued to improve on Wednesday thanks to healthy demand for municipals and better Treasuries, said market insiders.

"Treasuries are better, and there's just a good amount of demand for munis," said one trader.

"We were sweating for a while, but the supply seems to be getting digested better than expected. The middle of the curve, yields are down maybe 10 [basis points]. It's not as dramatic elsewhere, but firmer all over."

The week has provided - and will continue to provide - the most supply seen in several weeks, but the news isn't necessarily bad, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

"This will be the busiest new issue week in several, and thus far the increased flow is having a positive impact on the market," he said.

"Although increased supply might typically pressure prices, the higher activity level has been stimulative, guiding munis higher. ..."

Rates to cause 'paper losses'

In broader market news, the DWS Investments municipal bond team released a report Wednesday on the impact of inflation on municipal bonds.

"Rising rates cause the individual bond's price to drop, but investors take comfort because they only have 'paper losses' if they hold to maturity," said the team, which includes Philip G. Condon, head of municipal bond portfolio management; Carol L. Flynn, head of municipal bond research; Ashton P. Goodfield, head of municipal bond trading; and Anthony Parish, fixed-income product specialist.

The bond's income, the team wrote, will remain fixed.

"Rising rates also cause pricing pressure in the bond manager's portfolio, but there are some important distinctions," wrote the DWS team.

"For one, not all bonds respond uniformly to rate changes. This is incredibly important, because many investors believe buying shorter maturities is always safer. Should short-term interest rates rise substantially more than long-term rates, this strategy will not pay off. In today's interest-rate environment with a large difference in yields between short- and long-term municipal bonds, this is a distinct possibility. Plus, an investor gives up a lot of yield to stay short. Remember, an inflation hedge is only as good as the price you pay for it."

Virginia deal prices

Heading up the day's primary action, the Commonwealth Transportation Board of Virginia came to market with $600 million of series 2011 transportation capital projects revenue bonds, said a pricing sheet.

The bonds (//AA+) were sold competitively with Wells Fargo Securities LLC winning the bid. The true interest cost came in at 4.0246%, said Evelyn Whitley, debt management director for the Virginia Department of Treasury.

The bonds are due 2012 to 2036 with coupons from 2.25% to 5.25%.

"The board typically sells its bonds on a competitive basis, but competitive sales are not required," Whitley said in an interview Wednesday.

"Market conditions led to a greater consideration of a negotiated sale, but in the end, they decided to stick with competitive."

Proceeds will be used to fund transportation infrastructure projects.

Dasny sells school bonds

In other major offerings, the Dormitory Authority of the State of New York priced $332.88 million of series 2011 school districts revenue bond financing revenue bonds, said a pricing sheet.

The offering included $267.825 million of series 2011A bonds (A1/A+/A+), $39.75 million of series 2011B bonds (A3/A+/A+), $7.885 million of series 2011C bonds (Aa3/A+/A+) and $17.42 million of series 2011D bonds (A2/A+/A+).

The 2011A bonds are due 2012 to 2030 with 3% to 5% coupons.

The 2011B bonds are due 2012 to 2025 with term bonds due in 2031 and 2039. The serial coupons range from 2% to 5.25%. The 2031 bonds have a 4.75%, and the 2039 bonds have a 5.25% coupon.

The 2011C bonds are due 2012 to 2025 with 2% to 5% coupons.

The 2011D bonds are due 2012 to 2026 with 2% to 5% coupons.

Jefferies & Co. and RBC Capital Markets LLC were the senior managers.

Proceeds will be used to finance school district capital facilities and capital equipment, as well as refinance bond anticipation notes.

Massachusetts Water prices

Elsewhere Wednesday, the Massachusetts Water Resources Authority priced $150 million of series 2011B general revenue bonds, said a pricing sheet.

The bonds (Aa1/AA+/AA+) were sold through J.P. Morgan Securities LLC.

The bonds are due 2012 to 2031 with term bonds due in 2036 and 2041. The serial coupons range from 2% to 5%. The 2036 bonds have a 5% coupon priced at 103.056. The 2041 bonds have a 5% coupon priced at 102.565.

"Early afternoon levels on maturities out through 10 years featured yields from 1 to 3 bps lower than earlier levels while the 20-year maturity repriced 4 bps higher to 4.25%," said Janney's Schankel.

"The final scale dropped yields by 2 bps in 30 years to 4.68%."

Proceeds will be used to fund capital improvements, including the construction and maintenance of water and sewer systems.

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