Municipals remain flat amid light trading; about $4.5 billion of new issues expected this week

By Sheri Kasprzak

New York, Feb. 4 - Municipals were mostly unchanged on Monday with little secondary market action to push yields, market insiders reported.

"I'd call it flat," a trader said. "Trading is extremely light, and we're waiting to see what happens with new issues coming up this week."

Meanwhile, demand remains solid, according to Tom Kozlik municipal credit analyst with Janney Montgomery Scott LLC, but the news is not 100% positive.

"Although demand in the municipal bond market has remained strong so far in 2013, with $1.4 billion of inflows reported as of Jan. 23 and $6.3 billion total for the year, primary market supply is shaping up to be only moderate for the first week of February at only about $4.5 billion," Kozlik said Monday.

Among the larger deals during the week, Kozlik said the State of Connecticut plans to price $200,995,000 of series 2013 state revolving fund general revenue bonds through Bank of America Merrill Lynch. Janney will be one of the co-managers.

The Connecticut deal includes $123.48 million of series 2013A bonds and $77,515,000 of series 2013B bonds.

Proceeds will be used to make loans to qualified government entities and to refund existing debt.

Pennsylvania address ahead

In political news, Pennsylvania's Gov. Tom Corbett will make a budget address on Tuesday that could impact municipals, said Kozlik.

"Corbett is expected to provide details about how he plans to control [Pennsylvania] pension costs, a key reason the commonwealth (A2/AA/AA+) faced negative rating actions during the summer of 2012," Kozlik said.

"Some observers are even referring to the upcoming hints about how the governor might further reduce funding that could affect municipal sectors, such as Pennsylvania local governments, higher education and health-care facilities."

Downgrades outnumber upgrades

In ratings news, Fitch Ratings reported Monday that during the fourth quarter of 2012 and for the 16th consecutive quarter, U.S. public finance rating downgrades outnumbered upgrades.

"Both the number of upgrades and downgrades decreased from 3Q'12," Sarah Repucci, senior director with Fitch, said in a statement.

"Negative actions are expected to remain elevated, as negative rating outlooks exceeded positive rating outlooks in 4Q'12. However, a vast majority of rating actions (84%) during the fourth quarter were affirmations, with no change in rating outlook or rating watch status. Furthermore, 91% of ratings had a stable outlook at the end of the fourth quarter."

Downgrades, according to Repucci, account for a small percentage of total public finance rating actions.

In the fourth quarter, Fitch downgraded 41 credits, or 5.2% of all rating actions and $31.9 billion in par value. In the third quarter of 2012, Fitch cut 54 credits.

Fitch upgraded 15 credits in the fourth quarter, representing 1.9% of all rating actions and $7 billion in par value. The agency upgraded 22 credits in the third quarter of 2012.

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