Munis close out week firmer but underperform Treasuries; Pennsylvania deal to lead new issues

By Sheri Kasprzak

New York, April 13 - Municipals were firmer on Friday after suffering some losses on Thursday, market insiders reported. Despite the nudge, however, munis still underperformed Treasuries, said traders reached during the session.

"Around 10 years, yields firmed by 1 to 2 basis points," one trader said.

"There were some bids that really pushed the market along this morning, so things are firming up [in the afternoon]."

Meanwhile, about $4.5 billion of new issues are scheduled for the coming week, said Alan Schankel, managing director with Janney Montgomery Scott LLC. The largest offering announced so far will be a $950 million sale of general obligation bonds from the Commonwealth of Pennsylvania. The bonds will be sold competitively and are due 2013 to 2032.

Proceeds from the sale will be used to construct, acquire and rehabilitate capital facilities, improve sewage treatment systems and maintain and protect environmental projects, including open space and farmland preservation.

More broadly, Schankel said flows to municipal mutual funds were positive in the week ended April 4 at $572 million.

"Except for $139 million in outflows two weeks earlier, flows have been positive in every week since late August, with over $17 billion of new money year-to-date," Schankel wrote at the end of the week.

California trades in secondary

Looking to the secondary market on Friday, the State of California's series 2012 various purpose G.O. bonds that priced on Thursday were seen moving in the secondary market.

The 30-year bonds were seen trading at 4.375% after pricing at 4.47%. During Wednesday's retail order period, the 30-year yields came in at 4.45%.

The 2024 bonds were seen trading Friday afternoon at 3.2% after pricing at the same rate.

The interest in the California bonds was no surprise for one market insider, who pointed out that there have not been a lot of California bonds in the market recently.

"There's loads of interest in California, mostly because there hasn't been much of it to go around," he said.

The state finalized the pricing details late in the week after a two-day retail order period, said Tom Dresslar, spokesman for the state treasurer's office.

"The deal includes $890 million of new money for infrastructure projects and $464 million of refunded bonds," Dresslar said.

"The refunded bonds produce the borrowing-cost savings for taxpayers because the new interest rates on those bonds are lower."

Retail gobbled up about $418.94 million of the bonds, said Dresslar, making up 30.9% of the offering.

Yields from 0.68% to 4.47%

The new money bonds are due 2014 to 2020 with term bonds due in 2035, 2037 and 2042. The serial coupons range from 2% to 5%. The 2035 bonds have a split maturity with a 4.25% coupon priced at 98.841 to yield 4.33% and a 5.25% coupon priced at 108.964 to yield 4.14%. The 2037 bonds have a 4.25% coupon and priced at 97.444 to yield 4.42%. The 2042 bonds have a split maturity with a 4.375% coupon priced at 98.437 to yield 4.47% and a 5% coupon priced at 104.866 to yield 4.39%.

The G.O. refunding bonds are due 2014 to 2024 with coupons from 2% to 5% and yields from 0.68% to 3.20%.

The bonds (A1/A-/A-) were sold through lead managers Citigroup Global Markets Inc., Bank of America Merrill Lynch and Morgan Stanley & Co. LLC.

Proceeds will be used to fund construction projects and to current and advance refund some of the state's outstanding G.O. bonds for debt service savings.

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