Munis mostly flat; week's primary activity slows; HFAs trend toward MBS passthrough bonds

By Sheri Kasprzak

New York, May 2 - Municipal yields were little changed to firmer in spots, market sources said, as the bulk of new issues cleared the calendar.

"It's slower today, both in secondary and primary," a trader said in the afternoon.

"The big stuff that was slated to price has already priced, and trading is very light."

Next week will offer quite a few competitive deals, but new issue volume should remain rather subdued.

MBS passthroughs see surge

Moving to market trends, state housing finance agencies sold more than $1 billion of mortgage-backed security passthrough mortgage revenue bonds since 2012 in a structure that many agencies are using to combat a low-interest-rate environment.

These bonds offer attractive yield pickups compared to traditional Ginnie Mae mortgage-backed security passthroughs, said Tom Kozlik, municipal credit analyst with Janney Montgomery Scott LLC.

"This 'new' state HFA MBS passthrough bond shares many similarities with a traditional GNMA passthrough. It has a long-dated maturity, investors receive a pro-rata portion of principal payments, interest and prepayments on a monthly basis, and there are no sinking funds," Kozlik wrote.

"Traditional mortgage revenue bonds are usually structured with sinking funds. However, the coupons (at par) for the HFA passthrough issues have been significantly higher in most cases than traditional GNMA passthrough certificates. This is for several reasons but largely has to do with the overall relative immature nature of the market, structure variations and the HFA passthrough bond's current lack of liquidity.

"It is also important to note that most HFA passthroughs possess an optional redemption provision.

"But interest has steadily increased, and we have started to see secondary trading in this new type of bond materialize. We are not certain how long HFAs will utilize this structure, but as long as interest rates remain low, it will likely remain an attractive option for HFAs."

Louisiana, Illinois in market

Looking to the coming week, the State of Louisiana and the State of Illinois both plan to hit the market with sizable competitive offerings.

Louisiana is set to price $300 million of series 2013 general obligation bonds on Tuesday.

Proceeds from that offering will be used to finance general government, cultural, tourism, recreation, public safety, corrections, transportation and education projects.

The sale includes $130.71 million of series 2013A G.O. bonds due 2014 to 2033 and $169.29 million of series 2013B taxable G.O. bonds due 2014 to 2026.

Illinois plans to price $300 million of series May of 2013 sales tax revenue Build Illinois Bonds on Thursday.

Proceeds from that deal will be used to finance state capital projects.

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