Municipals close mixed as most of week's offerings price; banks increase muni holdings

By Sheri Kasprzak

New York, Oct. 11 - Muni yields were mixed on Thursday, as most of the week's largest offerings hit the market, said traders reached in the afternoon.

"Some points on the curve are a bit stronger today, and others are off a touch," said one trader reached in the late afternoon.

Secondary action did pick up somewhat, said the trader, with some recently freed-to-trade bonds trading cheaper, the trader reported.

The mixed tone of the market followed some slight weakness on Wednesday.

Retail investors were eager to pick up some of the week's larger offerings. The Dormitory Authority of the State of New York saw a good response to its $887 million sale of state personal income tax revenue bonds (/AAA/AA), said Alan Schankel, managing director Janney Montgomery Scott LLC.

During the retail order period, the 25-year maturity saw a preliminary pricing of 3.5% at par, Schankel said.

Bank of America Merrill Lynch, J.P. Morgan Securities LLC and Siebert Brandford Shank & Co. LLC are the managers for the offering.

Banks increase muni holdings

Meanwhile, banks increased their muni bond holdings to $330 billion as of June 30, said James Klotz, president of FMS Bonds, Inc., marking a $20 billion increase over the past year and the biggest jump in 27 years.

J.P. Morgan Securities LLC increased its muni holdings to $37.5 billion as of June 30, a $14.7 billion increase from 2010, said Klotz. Wells Fargo held more than twice as much municipal debt during the same period, from $18 billion two years ago to $40 billion as of the end of June.

"The reasons for their enthusiasm? Tougher regulations compel them to increasingly look for safer investments," Klotz wrote in a report Thursday.

"They're expecting profit margins against declining interest rates, while liquid investments give them more flexibility. Better still, municipal bonds are providing outstanding returns."

Munis held by Wells Fargo, Klotz noted, had an average yield 4.39%, which compares to its 1.6% average Treasury yield and its 4.32% average mortgage-backed securities yield.

Retail is reluctant

The current interest-rate environment could be keeping some retail investors out of the market, Klotz said.

"Holding cash, or parking it in a money-market fund that pays virtually nothing can be expensive," he said.

"We refer to this phenomenon as the cost of waiting. Fact is, tax-free bonds continue to make as much sense for individual investors as they do for institutions. Taxes are expected to rise regardless of who wins in the November elections, and despite some notable though rare exceptions, credit quality is general improving. Further, as Europe's debt crisis continues to unfold, munis are regarded as a safe haven."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.