Munis soften along with Treasuries; week ahead to bring $7 billion including Puerto Rico deal

By Sheri Kasprzak

New York, March 2 - Municipals were weaker on Friday along with Treasuries, said market insiders.

Ten- to 20-year yields, which had been firmer earlier in the week, gave up those gains to soften by about 1 to 2 basis points, said one trader reached in the afternoon.

"A lot of it is data and headlines," the trader said.

"There's news out of Europe, there's been economic news, so Treasuries were a bit off today because of that. We're following along."

Coming up in the week ahead, there will be about $7 billion of new issues, said Alan Schankel, managing director with Janney Montgomery Scott LLC, including a substantial sale from the Commonwealth of Puerto Rico.

The commonwealth is set to price $1.9 billion of general obligation public improvement refunding bonds through Barclays Capital Inc., J.P. Morgan Securities LLC and UBS FS Puerto Rico. The offering will be conducted in two tranches, and proceeds from the sale will be used to repay the Government Development Bank's lines of credit and to refund existing debt.

Schankel noted that the Puerto Rico deal is a refunding and will not add to debt. Following this offering, Puerto Rico will have issued almost $4.5 billion of debt this year alone.

New York water to price

Also coming up during the week, Schankel said, is a $500 million offering of water and sewer system second general resolution revenue bonds from the New York City Municipal Water Finance Authority.

The bonds (Aa2/AA+/AA+) will be offered through M.R. Beal & Co.

Proceeds will be used to make a deposit to the authority's construction fund and repay existing commercial paper notes.

California yields increased

After pricing its $1.99 billion sale of G.O. bonds, yields on the State of California's offering had to be adjusted higher, said Schankel.

"As the overall market faded, yields had to be adjusted higher to finalize pricing," he wrote in a report.

"The 10-year maturity, for example, started at 2.7% at Tuesday's retail pricing, was adjusted to 2.69% on day two, but ended at 2.78% yesterday [Thursday], reflecting the overall market decline. Retail orders accounted for nearly half of the deal, according to state officials."

The bonds (A1/A-/A-), which were sold through Barclays, JPMorgan and Wells Fargo Securities LLC, are due 2013 to 2033 with a term bond due in 2038. The serial coupons range from 2% to 5.25%. The 2038 bonds have a split maturity with a 4.375% coupon priced at par and a 5% coupon priced at 107.005 to yield 4.13%.

Proceeds will be used to current refund existing G.O. bonds for a debt service savings.

Risk appetite grows

In the broader market, J.R. Rieger, senior vice president of fixed income indexes at Standard & Poor's, said Friday that investors are looking to take on more risk.

"Higher yield municipal bonds are in demand, as the S&P Municipal High Yield Bond index has returned 4.88%, year-to-date, and has an average yield of over 6.85% (over 10.5% taxable equivalent yield)," Rieger wrote.

"For the 12-month period ending Feb. 29, this sector of the market has returned over 15.5% as spreads between high-yield bonds and investment-grade bonds have narrowed. Investment-grade municipals returned 13.17% for the same period."

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