Municipals firm as Treasuries rally and stocks take a beating; California brings $450 million

By Sheri Kasprzak

New York, Oct. 25 - Municipals were mostly improved on Tuesday as the stock market took a hit and Treasuries rallied, market insiders reported. Also, a new slate of offerings priced with mostly favorable results, said one trader.

Yields were seen firmer by 1 to 4 basis points across the curve. The most improvement was seen at 15 years and 20 years.

"Treasuries are strong and stocks are weaker," said one trader reached during the afternoon.

"We seem to be getting pulled along with Treasuries, but there has been some solid pricing going on today, so I'm sure that is a factor as well."

Meanwhile, taxable municipals are getting some attention from investors even after the demise of Build America Bonds, said Alan Schankel, managing director with Janney Montgomery Scott LLC, in a report released Tuesday.

"Taxable munis have been around for many years, but until recently, they were treated as outliers in the municipal market, with little regular following and statistical information," Schankel wrote.

"This changed when the 2009 stimulus bill, known as ARRA, opened a 21-month window for the issuance of taxable Build America Bonds, or BABs. By forgoing the lower interest costs of tax-exempt bonds, municipal bond issuers were able to receive a federal payment equal to 35% of interest cost, which in most cases generated lower net interest expense for states, cities, towns and other municipal borrowers."

Taxables deserve following

Schankel noted that the total volume of BABs issuance was $180 billion, including $117 billion in 2010. This led to a record muni volume of $433 billion. He noted that before BABs, taxable bonds were largely limited to funding state and local pension plans.

"The legacy of BABs continues, with the amount of outstanding taxable municipal issues standing above $300 billion, about triple pre-2009 levels," Schankel wrote.

"Although not comparable to the size of the $3 trillion muni market or $8 trillion corporate bond market, the amount of outstanding taxable munis offers enough critical mass to justify a strong following from investors."

California brings $450 million

Heading up Tuesday's heavy primary slate, the State of California came to market with $450 million of series 2011 economic recovery refunding bonds, said a pricing sheet.

The bonds (Aa3/A+/A+) were sold through Barclays Capital Inc. and Wells Fargo Securities LLC.

The bonds are due in 2016 and 2017 and carry 4% coupons. The yield is 1.13% for the 2016 bonds and 1.25% for the 2017 bonds.

Proceeds will be used to refund the state's series 2004A and 2004C economic recovery bonds.

Build Illinois Bonds price

Another major sale during the session came from the State of Illinois, which priced $300 million of series 2011 sales tax revenue Build Illinois Bonds, according to a pricing sheet.

The bonds were sold competitively with Bank of America Merrill Lynch winning the bid.

The bonds are due 2013 to 2033 with a term bond due in 2036. The serial coupons range from 3% to 5%. The 2036 bonds have a 4.5% coupon and priced at 98.967.

Proceeds will be used to finance some capital projects.

Howard County prices

Elsewhere during the day, Howard County in Maryland sold $193.83 million of series 2011 general obligation bonds, said a pricing sheet.

The deal included $160.15 million of series 2011B consolidated public improvement project and refunding bonds and $33.68 million of series 2011B metropolitan district project and refunding bonds.

The 2011B consolidated public improvement bonds are due 2012 to 2031 with 3% to 5% coupons. The 2011B metropolitan district bonds are due 2012 to 2036 with a term bond due in 2041. The serial coupons range from 3% to 5%.

The bonds (Aaa/AAA/AAA) were sold competitively with Barclays Capital Inc. winning the bid. The true interest cost for the consolidated public improvement bonds was 2.859846%, and the TIC for the metropolitan district bonds was 3.313427%.

Nikki Hogue, budget officer with the county's Department of Finance, said Tuesday in an interview that the county isn't required to sell its debt competitively but chooses to do so.

"We're not required to sell competitively, but we go to the market pretty often," she said.

"Because we're triple-A [rated], it generally has worked out pretty well for us. Unless we have something different from what we normally do, we go competitively."

Proceeds will be used to repay the county's series 2011 commercial paper notes used to construct various capital improvements, including school, sidewalk, roads, police and public safety, community college, and parks and recreation projects as well as to refund the county's series 2002, 2003 and 2005 bonds, which were issued to complete water and sewer improvement projects.

Pinellas schools price deal

Also during the session, the School District of Pinellas County, Fla., released additional information about its $50 million sale of series 2011 tax anticipation notes in a pricing sheet. The offering was downsized from $80 million.

The notes (MIG 1) were sold competitively. Citigroup Global Markets Inc. was the winning bidder with a 0.2329% net interest cost, said Andrew Jacobsen, manager of cash and investments for the district.

The notes are due June 30, 2012, have a 1% coupon and priced at 100.506.

"The district is not required to sell its debt through competitive sale," said Jacobsen.

"However, on the advice of our financial adviser, and as a best practice, we have always sold the annual tax anticipation note competitively."

Proceeds will be used to fund operating expenses for the district ahead of the collection of ad valorem taxes.

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