Munis close mostly flat; Dallas-Fort Worth International Airport bonds unaffected by layoffs

By Sheri Kasprzak

New York, Feb. 17 - Municipals were mostly unchanged to close out an otherwise positive week, said traders, as new-issue and trading activity died down ahead of the three-day weekend.

"There's not a lot going on today," said one trader.

"There might be a touch of weakness in spots, but overall, we're not moving much."

Primary action will pick up again on Tuesday following the Presidents Day holiday, and there will be a fairly active calendar with about $4.5 billion of new offerings in store, said the trader.

Meanwhile, tax-exempt investment-grade municipals have returned 2.54% so far this year, as measured by the S&P National AMT-Free Municipal Bond index, said J.R. Rieger, vice president of fixed-income indexes at Standard & Poor's, but high-yield munis are really amped up as demand continues to outstrip supply.

"High-yield municipal bonds are making a run with the S&P Municipal High Yield Bond index returning 3.99% and yielding over 6.9% (over 10.5% taxable equivalent yield)," Rieger wrote in a report released Friday.

"[The] key driver of the high-yield market is the health-care sector, returning over 3.65%."

Nine-year bonds yield 2.59%

According to the S&P AMT-Free Municipal Series 2021 index, which tracks bonds due in 2021, tax-exempt yields for that maturity are 2.59%, or 30% higher than the 10-year U.S. Treasury bond yield.

"Using a 35% tax rate results in a taxable equivalent yield of 3.98%, or over double the yield of [a] 10-year U.S. Treasury bond," Rieger wrote.

Despite the fact that the yield curve flattened earlier in the year, it has begun to steepen in the last two weeks, Rieger noted.

"The difference in yields between the S&P AMT-Free Municipal Series 2013 and 2021 indices has moved from 225 basis points at year-end to 216 bps as of last night [Thursday]," Rieger wrote.

"The flattest point has been on Feb. 1," when the spread was 202 bps. "These indices track actual non-callable municipal bonds that mature in June, July and August of the years measured, so they give a true reflection of steepness of the curve."

The yield spread differential between high-yield munis and investment-grade munis has narrowed by 41 bps since the end of 2011, ending at 379 bps, according to Rieger.

"The spread narrowing indicates the market is willing to take on more risk for higher yield," he wrote.

Dallas-Fort Worth bonds price

In primary action, the Cities of Dallas and Fort Worth, Texas, brought $433.77 million of series 2012B non-AMT joint revenue refunding bonds for the Dallas-Fort Worth International Airport, said a term sheet.

The offering priced well despite some fears over layoffs at American Airlines, the airport's major carrier.

"Despite issuer exposure to American Airlines, this week's $433 million Dallas-Fort Worth Airport finalized pricing Thursday with lower yields in several maturities, including 9 basis points in the 2035 term maturity," said Alan Schankel, managing director with Janney Montgomery Scott LLC.

The bankrupt airline could be laying off a substantial number of its employees at the airport.

The bonds (A1/A+/A+) were sold through J.P. Morgan Securities LLC and Bank of America Merrill Lynch.

The bonds are due 2012 to 2032 with a term bond due in 2035. The serial coupons range from 2% to 5%. The 2035 bonds have a 5% coupon and priced at 117.578.

Proceeds will be used to refund the airport's series 2000A, 2001A, 2002B-C and 2003A bonds.

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