Municipals close mostly unchanged; issuance wanes; Illinois yields adjusted down 7-10 bps

By Sheri Kasprzak

New York, Feb. 7 - Municipal yields were mostly unmoved to close out a lazy Friday session, market insiders said.

"Trading is very light. Primary [supply] is over for the week, so it's quiet overall," said a trader in the afternoon.

Trading throughout the week was relatively lethargic, traders noted earlier in the week, with supply limited and investors showing little interest in the market.

It's the first session this week that Treasuries actually outperformed munis. After a lackluster nonfarm payrolls report from the Bureau of Labor Statistics, Treasuries got a boost. The five-year note yield fell by 4.5 basis points to 1.471%, and the 10-year note yield fell by 2 bps to 2.682%. The 30-year bond yield fell by half a basis point to close the week at 3.672%.

Illinois yields dropped

Meanwhile, the largest offering of the week saw yields adjusted downward by 7 basis points to 10 bps, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

"Illinois wrapped up its $1 billion issue with solid demand, and oversubscription allowed downward yield adjustments of 7 to 10 basis points in maturities out to 10 years and 4 bps on the long end with the longest 2039 maturity priced as 5% to yield 5.04%," Schankel said Friday.

"In general terms, since the December enactment of reforms to the state's pension system, spread differentials between 10 year yields of Illinois and MMD AAA benchmarks have narrowed by 50 basis points from 170 to 120. The reforms face court tests, as unions representing state employees and retirees seek relief from the changes, but the market is clearly willing to accept lower rates based on the pension system changes."

On Thursday, the state priced $1,025,000,000 of series of February 2014 general obligation bonds.

The bonds were sold through senior manager Citigroup Global Markets Inc.

The bonds are due 2015 to 2034 with a term bond due in 2039. The serial coupons range from 1% to 5.25%. The 2039 bonds have a 5% coupon priced at 99.433.

Proceeds will be used to finance capital development, transportation, school and job development projects within the state.

Moody's cuts Puerto Rico

In ratings news, Moody's Investors Service downgraded the Commonwealth of Puerto Rico's G.O. debt to Ba2 from Baa3, just days after Standard & Poor's cut the commonwealth's G.O. debt to BB+ from BBB-.

Moody's also cut the Puerto Rico Aqueduct and Sewer Authority revenue bonds to Ba2 from Ba1. The Puerto Rico Sales Tax Financing Corp.'s senior-lien bonds were cut to Baa1 from A2, and its junior-lien bonds were cut to Baa2 from A3.

"The problems that confront the commonwealth are many years in the making, and include years of deficit financing, pension underfunding and budgetary imbalance, along with seven years of economic recession," wrote Moody's analysts Emily Raimes and Edward Hampton.

"These factors have now put the commonwealth in a position where its debt load and fixed costs are high, its liquidity is narrow and its market access has become constrained.

"In the face of these problems, the administration has taken strong and aggressive actions to control spending, reform the retirement systems, reduce debt issuance and promote economic development. Despite these accomplishments, however, in our view the commonwealth's credit profile is no longer consistent with investment-grade characteristics."

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