Municipals strengthen again along with Treasuries; New York readies $850 million G.O. deal

By Sheri Kasprzak

New York, Feb. 26 - Municipal yields were stronger again on Tuesday following along with Treasuries, market sources said. And for the second straight session, investors flocked to shorter maturities in the secondary market.

"We're seeing a lot of block trades inside of 10 years. Overall, the tone is firm," one trader said in the afternoon.

Yields were seen firmer by 5 basis points or 6 bps inside of 10 years, with yields little moved out long. Investors, said one trader, are a little wary of longer maturities, with the perceived strength being among the shorter maturities.

The 10-year MMA triple-A yield was unchanged Monday at 1.9%, even as the 10-year benchmark Treasury yield fell by 10 bps, said Alan Schankel, managing director with Janney Montgomery Scott.

This puts the municipal-to-Treasury ratio above 100% for the first time in a month, he noted Tuesday.

New York preps issue

Looking ahead, the City of New York held its second retail order period for its planned $850 million offering of series 2013 general obligation bonds (Aa2/AA/AA).

In its first retail order period on Monday, the city sold $147 million of the offering, said Schankel.

The deal will be sold through Morgan Stanley & Co. LLC in four tranches. The offering opens to institutional investors on Wednesday.

The sale includes $500 million of series 2103F-1 tax-exempt bonds, $100 million of series 2013F-2 taxable bonds, $20 million of series 2013G tax-exempt bonds and $230 million of series 2013H tax-exempt bonds.

Proceeds from the sale will be used to finance capital projects for the city.

Tobacco settlement deal ahead

In other primary action for the week ahead, South Dakota's Educational Enhancement Funding Corp. is slated to price $170.79 million of series 2013 tobacco settlement revenue bonds.

The deal includes $122,535,000 of series 2013A taxable bonds (/A/), which are due 2013 to 2023, and $48,255,000 of series 2013B tax-exempt bonds (/A-/), which are due 2023 to 2028.

Barclays and Dougherty & Co. LLC are the senior managers.

Proceeds will refund the corporation's series 2002A-B bonds.

Tobacco settlement bonds have long faced scrutiny from both ratings agencies and investors.

Moody's Investors Service put the corporation's series 2002A-B tobacco settlement asset-backed bonds on review for possible downgrade back in January. Previously, Moody's had upgraded the series 2002A taxable bonds to A1 and the series 2002B tax-exempt bonds to A3.

Moody's said in a recent report that it was in the process of reviewing several tobacco settlement bonds due to the credit implications caused by a proposed agreement announced in December to settlement payment disputes for the years 2003 to 2012 between major tobacco manufacturers and 17 states and two territories.

"On a net basis, the joining states will receive only 54% of the approximately $4 billion share under dispute, significantly less than the 100% that we expected," the Moody's report said.

"In addition, by setting forth a new formula for addressing future payment disputes, the agreement suggests that similar payment disputes and concomitant settlements at less than 100% could continue for a long period of time, potentially for the entire term of the bonds."

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