Muni yields firm as Treasuries strengthen; Illinois governor releases budget proposal details

By Sheri Kasprzak

New York, Feb. 17 - Municipal yields were better yet again on Thursday as Treasuries improved and the market responded to more positive widespread media reports on municipals. Yields were seen better by about 4 to 5 basis points across the curve.

Although retail investors jumped ship following bad press over the perceived risk of defaults and bankruptcies in the market, some analysts have come to the defense of the market, and word that municipals might be the place to head for yield is starting to spread, said one sellsider.

"Hedge funds are starting to perk up and pay attention to the [muni] market," said the sellsider.

"It's an odd marriage, but we'll take it. It's a great place for low risk and big yield."

Muni yields, said one trader, responded well to a boost in the Treasury market as well as a stagnating primary market.

Meanwhile, Alan Schankel, managing director at Janney Montgomery Scott LLC, noted that outflows from mutual funds continue, but the rate has slowed.

"Fund flows, as evidenced by [the] latest ICI data for the week ended Feb. 9, are still outgoing with $1.34 billion in redemptions," he wrote in a report released Thursday.

"The pace has slowed, but this makes the fourteenth consecutive week of outflows."

Illinois preps sale

On Thursday, Illinois Gov. Pat Quinn unveiled his proposed budget, including a request for the authorization of an $8.75 billion bond issue that he characterized as a "debt restructuring." Most of the proceeds from the deal would be used to pay backlogged bills, noted Schankel.

"The budget would increase spending by 5% but includes cuts to Medicaid, a prescription drug program and public school busing," Schankel added.

The state is poised next week to bring $3.7 billion of pension bonds through Morgan Stanley & Co. Inc., Goldman Sachs & Co. and Loop Capital Markets LLC.

Florida governor rejects rail

In other governor-related news, Florida Gov. Rick Scott rejected a $2.4 billion federal grant to build a high-speed rail link between Tampa and Orlando, claiming the risks outweigh the benefits. Ohio and Wisconsin have rejected similar proposals, noted Schankel.

"Times are tough for many states, but such proposals are a good example of states' sovereign ability to address financial problems," Schankel said.

Fremont sale set

Looking out on the horizon, the Fremont Redevelopment Agency of California announced plans Thursday to price $138.03 million of series 2011 tax allocation bonds (A2/A+/) through Goldman Sachs and Morgan Stanley.

The bonds are due 2011 to 2036, and the proceeds will be used to finance a variety of redevelopment activities, including the construction of a new Bay Area Rapid Transit station in Fremont.

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