Muni yields close mostly flat as market prepares for $5 billion of supply; long bonds improve

By Sheri Kasprzak

New York, Dec. 12 - Municipals stayed fairly quiet to kick off yet another active week for primary supply, said traders reached during the session.

"Secondary has been hit or miss; there's just not a lot moving," said one trader.

"There seems to be a lack of direction. I think a lot of investors are waiting for pricing to give them some sense of direction. I think demand is still strong, so of course we're hopeful this week will be as strong as last week."

The one bright spot was the long end of the curve, where yields were seen lower by more than 6 basis points.

Negotiated primary volume in the week ahead is estimated at about $5 billion, said Tom Kozlik, municipal credit analyst with Janney Montgomery Scott LLC.

Meanwhile, Kozlik said in a report, a likely recession in Europe will not help the U.S. state governments' fiscal standing. Even so, he noted, damage will not be severe.

"U.S. states' exposure from exports to Europe comes in at just 1.8% of states' GDP and is not a significant threat," Kozlik wrote.

"Only Utah (5.6%), South Carolina (4.1%), West Virginia (3.9%), Louisiana (3.5%) and Kentucky (3.1%) possess an economy reliant on exports to Europe of more than 3% of state GDP. These five states are relatively more vulnerable, but overall U.S. state exposure to European exports is low and does not pose a significant threat to state credit quality."

Attractive pricing ahead

Europe's debt crisis is unlikely to impact the pricing of municipals, said James Camp, managing director of fixed income at Eagle Asset Management.

"We see markedly improving credit with attractive pricing, especially given lower issuance and likely tax changes surrounding the 2012 elections," said Camp.

"There is an overall theme of capital preservation in a deflating environment."

Given the current financial climate, non-cash fixed-income vehicles are vulnerable, said Camp, and sovereign debt writedowns are the only real endgame left for Europe.

Puerto Rico deal leads week

Heading up the week's negotiated issuance will be a $568.215 million sale of series 2011 Ports Authority project revenue bonds from the Puerto Rico Infrastructure Financing Authority, said Kozlik.

The sale includes $283.205 million of series 2011A taxable bonds, $163.54 million of series 2011B tax-exempt bonds and $121.47 million of series 2011C tax-exempt bonds.

Wells Fargo Securities LLC and RBC Capital Markets LLC are the senior managers for the bonds (Baa1/BBB/).

Proceeds will be used to pay some amounts owed to the Puerto Rico Electric Power Authority by the Ports Authority, to repay loans and lines of credit issued by the Government Development Bank, to repay commercial loans and to terminate swap agreements connected to those loans.

The authority last sold debt in October 2007. The authority then issued $39.8 million of mental health facility revenue bonds with coupons from 5.6% to 6.5%.

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