Muni market braces for bumpy ride; yields unchanged on heavy tone; primary activity light

By Cristal Cody

Tupelo, Miss., Aug. 8 - Municipal bond yields held unchanged on Monday, and the tone was heavy as the market absorbed that Standard & Poor's downgraded the United States' AAA credit rating late Friday, according to bond sources.

"The municipal market is up, but there seems to be a little bit of an edge," a trader said late afternoon. "We haven't seen yet what the downgrades are going to be, but everyone suspects all the escrow and pre-refunded stuff will get the same rating as S&P for the government, AA+. People are begging us for bids. I get the impression there's not a lot of depth to this market, while it looks like it may have rallied."

Despite the downgrade to the United States' credit rating, investors flew into longer-term Treasuries as stocks sold off. The yield on the 10-year benchmark Treasury note dropped to 2.31% from 2.56%. The 30-year bond yield fell to 3.65% from 3.84%.

Municipal bond yields were "pretty much unchanged from Friday, but definitely with a heavy kind of tone," the trader said.

No new primary activity came on Monday, and issuance is expected to stay light for the week.

"It's going to be a pretty quiet week from the new issue perspective," a bond source said. "It will probably be the lightest week in a long time, particularly for this time of year. People are reluctant to put any deals on the calendar."

LA Water and Power to sell

A few issuers did announce smaller deals for the upcoming weeks. The largest deal announced is a $311.65 million offering of water system revenue bonds from the Department of Water and Power of the City of Los Angeles.

The series 2011A bonds (Aa2/AA/AA+) will price through a negotiated sale, according to a preliminary official statement.

Citigroup Inc. is the lead manager, and the co-managers are J.P. Morgan Securities LLC, Siebert Brandford Shank & Co., LLC, Loop Capital Markets LLC, RBC Capital Markets Corp. and Wells Fargo Securities LLC.

Proceeds will be used to refund a portion of the outstanding series 2001A revenue bonds and series 2004C revenue bonds.

South Coast agencies to price

Also in California, the South Coast Local Education Agencies will sell $102.35 million of pooled tax and revenue anticipation notes for the Orange County Department of Education, the Anaheim City School District and the Capistrano Unified School District, according to a preliminary official statement.

The sale includes $13 million of series 2011A notes due June 29, 2012, $74.99 million of series 2011B notes due May 15, 2012 and $14.36 million of series 2011C notes due Aug. 31, 2012.

Piper Jaffray & Co. will manage the negotiated sale.

Proceeds will be used for operating cash.

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