Municipal yields close firmer along with Treasuries; $8 billion of new deals set for week ahead

By Sheri Kasprzak

New York, Sept. 28 - Muni yields were yet again firmer after a week of improvement, market insiders said, helped in part by better Treasuries and by a new crop of deals freed to trade.

"A lot of stuff is trading and doing pretty well," said a trader reached late in the day.

"Mostly stuff that just freed to trade. Most stuff that priced this week is already moving in secondary, so that's a good sign. Treasuries are also better, so that's also a factor."

Meanwhile, about $8 billion of new issues are expected to hit the market in the coming week, nearly matching this week's new-issue calendar, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

High-yield munis return 14.2%

In other muni news, the Standard & Poor's Municipal Bond High Yield index has benefited from yield-driven investors reaching for yield in a low-rate environment, said J.R. Rieger, vice president of fixed income indexes with S&P.

"The high-yield muni market has returned 14.2% year-to-date as yields have come down 116 bps since year-end," Rieger said in a report released Friday.

Rieger said the spread between investment-grade and high-yield munis ended Thursday night at 320 basis points, a tightening of 87 bps since year's end.

"The dropping of yields to these levels doesn't compensate investors for the risk," Rieger said.

"For investors in this part of the market, risk is a combination of liquidity risk, interest rate risk, default risk and the risk that credit spreads will widen back to more historical levels."

The high-yield sector includes low-income housing, health care, land-backed financings, tobacco settlement bonds, gaming and corporate-backed municipal bonds and airline-backed bonds, said Rieger.

"These sectors have a higher incident of default than those of the general obligation and essential purpose municipal bond market," Rieger said.

"While the risk of default is ever present, the possibility of credit spreads widening and driving bond prices down should be elevated as credit spreads are at historical tight levels and are poised to begin to widen."

Tax-exempts return 6.07%

Meanwhile, tax-exempt investment-grade munis, as tracked by the S&P National AMT-Free Municipal Bond index, have returned 6.07% in the year to date, said Rieger, while longer-duration taxable investment-grade munis have returned just under 10.5%.

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