Municipals flat as large deals firm in secondary; Dasny yields drop in institutional pricing

By Sheri Kasprzak

New York, Oct. 12 - Municipal yields were mostly unchanged on Friday to close out a week that featured some large pricings and some instability, market insiders said.

"Yields aren't moving by that much, but we are seeing some of the week's larger deals trading firmer in secondary," said one trader reached in the afternoon.

Bonds that were freed to trade included San Antonio's $550.37 million sale of convention center lease revenue and refunding bonds, Denver's $856.21 million sale of airport system bonds and the Los Angeles County Public Works Financing Authority's $339.41 million sale of lease revenue bonds. The week's largest offerings - the Dormitory Authority of the State of New York's $878 million offering and the Massachusetts School Building Authority's $916.35 million bonds - were not yet freed to trade.

Meanwhile, retail investors continue to show interest in munis, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

"Retail investors continue to pour cash into municipal mutual funds as indicated by the most recent data from the Investment Company Institute," said Schankel in a report released Friday.

"In the week ended Oct. 3, inflows totaled $2.8 billion in the strongest weekly pace in three years. A further indication of investment sentiment is seen in equity outflows, with $10.5 billion leaving domestic equity funds, the strongest outflows in more than a year. Taxable bond funds were also large recipients of investor flows, adding $8 billion. Increasing media focus on the fiscal cliff likely has had some impact on retail investor sentiment."

Massachusetts ups school bonds

According to Schankel, the Massachusetts School Building Authority offering of senior dedicated sales tax refunding bonds saw so much demand that the deal was upsized to $916.35 million from $725 million, a 22% increase.

The bonds (Aa1/AA+/AA+) were sold through Jefferies & Co., Citigroup Global Markets Inc. and J.P. Morgan Securities LLC.

The bonds are due 2017 to 2020 and 2027 to 2030 with 3% to 5% coupons.

Proceeds will be used to refund the authority's series 2005A revenue bonds.

"The other major issue of the week, $810 million of Dormitory Authority of the State of New York personal income tax bonds (/AAA/AA), had institutional pricing Thursday with yield reductions in the 7 to 9 year maturity range compared to Wednesday's retail scale," said Schankel.

"An indication of the market's view of kickers is the bifurcated 2037 maturity with a 3.5% at par as well as 5% to yield 3.18%."

PITs sold in three tranches

The authority sold $878.86 million of PITs in three tranches through Bank of America Merrill Lynch, J.P. Morgan Securities LLC and Siebert Brandford Shank & Co. LLC.

The deal included $763.6 million of series 2012D bonds, $54,655,000 of series 2012E bonds and $60,605,000 of series 2012F taxable bonds.

The 2012D bonds are due 2013 to 2034 with term bonds due in 2037, 2040 and 2042. The serial coupons range from 1.5% to 5%. The 2037 bonds have a 3.5% coupon priced at par and a 5% coupon to yield 3.13%. The 2040 bonds have a 5% coupon to yield 3.18%, and the 2042 bonds have a 5% coupon to yield 3.2%.

The 2012E bonds are due 2014 to 2034 with a term bond due in 2037. The serial coupons range from 2.5% to 5%. The 2037 bonds have a 5% coupon to yield 3.28%.

The 2012F bonds are due 2014 to 2022 with coupons from 0.57% to 2.592% priced at par.

Proceeds will be used to finance capital projects for the State University of New York.

High-yield munis move higher

In other muni news, high-yield municipals, as tracked by the S&P Municipal Bond High Yield index, moved modestly higher along with the general market this week, adding to the index total return of over 14.6% year to date, said J.R. Rieger, vice president of fixed income indices with Standard & Poor's.

"The yield spread between investment-grade and high-yield municipal bonds has hovered around 321 [basis points]," Rieger said.

In general, revenue bonds have outpaced G.O.s with the S&P Municipal Bond Revenue index returning 7.98% while G.O. bonds tracked in the S&P Municipal Bond General Obligation index showed a return of 5.62%.

"State general obligation bonds are still underperforming relative to locally issued general obligation bonds with state G.O.s returning 4.88% versus local G.O.s returning 6.63% year to date," Rieger said.

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