Municipals edge higher along with Treasuries; Massachusetts offers up $600 million G.O. bonds

By Sheri Kasprzak

New York, Aug. 1 - Municipals ended out another session weaker following a substantial drop for Treasuries, market insiders said.

Treasuries were weaker, sending municipal yields up, traders said. The 30-year Treasury bond climbed 12 basis points, closing at the highest level since the summer of 2011, according to reports. The 10-year note was up 13 bps.

Municipal yields climbed 5 bps to 7 bps in sympathy with Treasuries, said a trader in the early afternoon.

Long bonds struggle

Looking to trends, short municipal bonds were seen holding on while long bonds suffered, according to a report released Thursday by J.R. Rieger, vice president of fixed-income indexes with Dow Jones-S&P Indices.

"Fund outflows in the municipal bond asset class, in part driven by the Detroit bankruptcy, pushed municipal bond performance down in July according to the S&P National AMT-Free Municipal Bond index," Rieger wrote.

Puerto Rico was hit the hardest by the slump, Rieger reported. The S&P Municipal Bond Puerto Rico index was down 4.1% in July and down 6.61% for the year to date.

"State-specific municipal bond mutual funds with large percentages of Puerto Rico paper due to triple tax-exemption will have felt the pain," he said.

Short bonds saw positive returns in July of 0.27%, while long bonds suffered. Investment-grade municipals recorded a negative 1.08% return for the month and were down 3.87% for the year to date.

Downgrades exceed upgrades

Moving to ratings actions, Fitch Ratings reported Thursday that U.S. public finance downgrades exceeded upgrades during the second quarter. This marks the 18th consecutive quarter in which downgrades outnumbered upgrades, the report said.

"Negative actions are expected to remain elevated, as negative rating outlooks exceeded positive rating outlooks (3.3:1) at the end of 2Q13," said the report from senior director Sarah Repucci.

"However, a vast majority of rating actions (84%) during the second quarter were affirmations with no change in rating outlook or rating watch status. Furthermore, 90% of ratings had a stable rating outlook at the end of the second quarter."

Second-quarter downgrades accounted for 68 credits, roughly 6.5% of all rating actions, with $53.8 billion in par value. In the first quarter of 2013, Fitch downgraded 57 credits. In the second quarter, Fitch upgraded 24 credits, representing 2.3% of all rating actions and $9.7 billion in par value. During the first quarter, Fitch upgraded 31 credits.

Massachusetts brings G.O.s

One of the larger competitive offerings of the week priced Thursday. The Commonwealth of Massachusetts sold $600 million of series 2013E consolidated loan general obligation bonds, said a pricing sheet.

The bonds (Aa1/AA+/AA+) were sold competitively with BofA Merrill Lynch winning the bid.

The bonds are due 2023 to 2026 and 2032 to 2043 with 4.25% to 5% coupons and 2.87% to 4.70% yields.

"Massachusetts saw strong demand for its $600 million competitive sale, with the longest maturity of 2043 pricing at 4.5% to yield 4.70%," said Alan Schankel, managing director with Janney Montgomery Scott LLC.

Proceeds will be used to finance capital expenditures within the state.

Nebraska bonds price

Amid the light primary activity on Thursday, the Nebraska Investment Finance Authority priced $100 million of series 2013 single-family housing revenue bonds, said a pricing sheet.

The bonds were sold through lead manager J.P. Morgan Securities LLC.

The deal included $75 million of series 2013C non-AMT bonds and $25 million of series 2013D AMT bonds.

The 2013C bonds are due 2023 to 2024 with term bonds due in 2028, 2035 and 2043. The serial coupons range from 3.55% to 3.75% and priced at par. The 2028 bonds have a 4.4% coupon and priced at par. The 2035 bonds have a 2.5% coupon, and the 2043 bonds have a 4.5% coupon; they were not reoffered.

The 2013D bonds are due 2014 to 2023 with 0.50% to 4% coupons. They all priced at par.

Proceeds will be used to acquire, purchase or finance mortgage loans.

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