Municipals firm again as Treasuries improve; volume expected to be $3 billion in coming week

By Sheri Kasprzak

New York, March 23 - Municipals closed out the week firmer after struggling earlier in the week against supply pressure and a lack of interest in the secondary market, insiders reported.

"We're pretty much following Treasuries, which are looking better so far. I'd say yields are firmer by 3 to 5 basis points," said one trader reached in the afternoon.

"After the week we've had, I'll take it. It will be interesting to see how things go next week when primary really drops off. I suspect that secondary will pick up again, and I think some of the pressure we have seen on yields may be alleviated somewhat."

The week ahead will indeed be substantially slower than recent weeks. Only $3 billion of new issues are expected to be offered.

"We could be moving into that summer season, where things do typically taper off," one trader said.

Thirty-day visible supply is at a meager $8.2 billion, the lowest level in several months.

Demand is still strong

Despite the fact that the new issue flow may be tapering, demand remains strong, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

"Demand for municipal bonds remains strong, illustrated by the 29th straight week of inflows to municipal mutual funds in the week ending March 14," Schankel wrote in a report.

"One point three billion dollars of new investment contributed to a total of $16.2 billion thus far in 2012."

Six defaults recorded in 2011

Moving to defaults news, Standard & Poor's updated its municipal default study, and the results indicate that there were six defaults of rated issues in 2011, Schankel noted in his report. This is compared to an annual average of 1.8 since 1986.

"S&P downgrades exceeded upgrades in 2011 for the first time in at least 10 years, though both Moody's and Fitch had more downgrades than upgrades in each of the past three years," Schankel wrote.

"Moody's noted that recently passed pension reform in New York provides a long-term credit benefit to the state as well as local New York borrowers. The state's plans are well-funded, with assets at about 100% of liabilities, the highest of any state, so unlike many states, New York has no need to catch up. Reforms, which are focused on new workers, include higher employee contribution rates and increases in retirement age."

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