Municipals weaken for third straight session; week to bring $4.5 billion of new offerings

By Sheri Kasprzak

New York, Jan. 23 - Municipals spent a third consecutive session in a slump Monday following a fairly long streak of solid improvement. Yields were seen lower by about 5 basis points on the long end, according to market insiders.

With little trading, it was tough to get a full read on the market, said one trader reached during the session.

"Secondary is pretty quiet, so there's not a lot of activity going on to really gauge the market. But once supply starts coming in, it should be easier to say [if the downward trend will continue]," the trader said.

Although the losses were not as severe as the 10 basis point-cut seen late in the previous week, the weakness was definitely felt.

"Before backing up in the latter days of last week, tax-free yields moved lower for nine straight sessions, as the technical math of strong, unfilled demand collided with thin new issue supply," said Alan Schankel, managing director with Janney Montgomery Scott LLC, in a report released Monday.

"Lower muni yields and Treasury yields above year-end levels led to a drop in [municipal-to-Treasury] ratios. Continuing positive mutual fund flows and the strong seasonal reinvestment proceeds of the December through February period will continue to buoy the municipal market until it runs into more significant supply than we've seen thus far."

Supply may increase soon

Increased supply could be coming soon. The week ahead will bring about $4.5 billion of new offerings. That's still below the $5.6 billion weekly average seen in 2011, said Schankel.

"Looking further into the future, it's noteworthy that the 30-day visible supply metrics show signs of life, with $9 billion currently on tap, as high as we've seen since late November," Schankel said.

"We expect total weekly issuance to accelerate in coming weeks, but this may not lead to an erosion of muni yield levels and ratios, since a significant part of upcoming new supply will be current refundings as issuers take advantage of low rates to refinance 2002 vintage issues with 10-year redemption features."

New York water deal ahead

One of the major offerings of the week is a $400 million sale of series 2012 water and sewer system second general resolution revenue bonds from the New York City Municipal Water Finance Authority.

Ramirez & Co. Inc. will bring the bonds (//AA+) in two tranches: $350 million of series 2012CC bonds and $50 million of series 2012DD bonds.

Proceeds will be used for a deposit to a construction fund and to refund existing commercial paper notes.

One market insider said recent demand could make the bonds particularly attractive, but the sellside source was hesitant to make any guesses as to how the bonds will be received by institutional investors.

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