Municipal yields end week little moved; nearly $6 billion of new issues expected in week ahead

By Sheri Kasprzak

New York, April 20 - Trading remained light on Friday, but yields held steady as the week's heavy supply finally dwindled, said market insiders.

"Yields aren't moving by much, but there's not really much going on," said one trader reached in the afternoon.

"It's almost like the market is taking a breather today. We had so much going on during the week, and everyone's waiting to see what's coming next week. Trading was pretty light, really one of the lightest days this week."

In the week ahead, about $6 billion of new issues are expected to come to market, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

"Next week's new issue calendar is shaping up to total about $6 billion, well below the recent $10 billion pace," Schankel said in a report released Friday.

"With demand strong, the amount of money available for reinvestment due to maturities and redemptions from advance refundings will grow from $12 billion this month to $18 billion in May."

High yield outpaces market

High-yield municipal bonds continue to outpace the overall muni market, according to J.R. Rieger, senior vice president of fixed-income indexes at Standard & Poor's.

High-yield munis, Rieger wrote Friday in a report, have returned more than 7.3% year to date as measured by the S&P Municipal High-Yield index.

"In general, municipalities are wrestling with this long economic cycle by making difficult decisions to reduce spending to offset lower revenue," Rieger wrote.

"Even with this reduced spending, some municipalities are struggling and there are high-profile defaults. For the first quarter of 2012, outstanding monetary defaults in the S&P Municipal Bond index rose by 0.08% to represent 0.58% of the par value of the index. The S&P Municipal Bond index tracks over $1.3 trillion par value of municipal bonds."

Tax exempts return 2.35%

Tax-exempt investment-grade municipals, for comparison, have returned 2.35% so far this year, according to the S&P National AMT-Free Municipal Bond index. Mutual funds continue to see cash inflows and new issue supply remains lower than historical levels, according to Rieger.

The yield spread differential between high-yield and investment-grade munis has narrowed by 78 basis points since the end of 2011, ending at 342 bps, said Rieger.

"The last time the spread differential was nearly this low was January 2011," Rieger wrote.

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

The yield curve in 2012 has remained fairly flat, according to Rieger.

"The difference in yields between the S&P AMT-Free Municipal Series 2013 and 2021 indices has moved from 225 bps at year-end to 215 bps as of last night [Thursday]," Rieger wrote.

"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."

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