Municipals continue improvement despite Treasury losses; muni airport sector seen stabilizing

By Sheri Kasprzak

New York, May 9 - Municipals rounded out Friday on a positive note, shrugging off losses in the Treasuries market, market insiders said.

Municipals have rallied for the past four sessions, improving as supply remains light and demand continues to be strong, market sources reported.

"Munis had a positive session yesterday with particular strength on the long end of the curve where the MMA 30-year AAA index fell 4 bps to 3.54%, even though 30-year Treasury yields rose 3 bps amidst a weak 30-year auction," Alan Schankel, managing director with Janney Montgomery Scott LLC, wrote on Friday.

"Pent-up demand from mutual funds and other investors is fueling the muni outperformance. Lipper reported $94 million of inflows to municipal mutual funds this week, but putting these funds to work faces the headwind of low new issue supply, with next week's calendar looking to fall below $5 billion. Demand will grow further as we enter the strong summer reinvestment months beginning in June."

Over in the Treasuries market, weakness continued, particularly for long bonds. The 30-year bond yield rose by 3.5 basis points to close at 3.469%, up a total of 10 bps on the week, market insiders said. The 10-year note yield rose by 2 bps to 2.623%, and the five-year note yield climbed by 1 bp to 1.627%.

Long bonds outshine

Moving back to municipal bond outperformance, demand for municipals outpaces supply and the result is strength from the five-year maturity range out, said J.R. Rieger, vice president of fixed-income indexes with S&P Dow Jones Indices.

Five-year non-callable munis, as tracked in the S&P AMT-Free Municipal Series 2019 index, have returned 2.19% this year, just about where the S&P 500 Total Return is, Rieger wrote Friday.

Around seven years, the S&P AMT-Free Municipal Series 2021 index has outpaced equities, returning 4.41% with yields dropping 33 bps so far this year. Bonds tracked in the S&P AMT-Free Municipal Bond 2023 index have dropped by 79 bps.

Long bonds have seen double-digit returns, with bonds in the S&P Municipal Bond 20-Year High-Grade Rate index returning just under 12% for the year to date with yields dropping 70 bps.

High-yield munis tracked in the S&P Municipal Bond High Yield index have returned 8.16% for the year to date, compared with 3.99% for U.S. corporate junk bonds tracked in the S&P U.S. Issued High Yield Corporate Bond index.

Looking to Puerto Rico, the S&P Municipal Bond Puerto Rico General Obligation index has returned 12.26% for the year to date, helping to offset a 2013 decline of more than 20%.

Airports rebounding

After several years of strife beginning back in 2001 after the Sept. 11 terrorist attacks, the airport sector seems to be making a comeback, Schankel wrote in a special report Friday.

"The municipal airport sector has stabilized in recent years, with most issuers rated in the A and AA categories," he wrote.

"Recent airline consolidation may have negative impacts on certain locations, but in general, we believe that the airline industry, which to a large extent underlies creditworthiness of the airport sector, is on its strongest financial footing in more than a decade.

"The outcome of the American-U.S. Air merger has yet to fully play out, with the potential for flight reductions and de-hubbing remaining, which could disproportionately affect airports with large concentrations of American or U.S. Air enplanements.

"Enplanement growth should be modest but positive in coming years, with the FAA projecting a 2% annual increase through 2017.

"Municipal bond investors should consider owning airport bonds as a portion (5% to 10%) of a diversified municipal bond portfolio."

Houston sold airport bonds

The report comes right on the heels of the City of Houston's $308.66 million airport offering. The city sold series 2014 AMT airport system refunding revenue bonds for United Airlines.

The bonds were sold through senior manager Citigroup Global Markets Inc.

The bonds are due 2020, 2024 and 2029, said a pricing sheet. The 2020 bonds have a 4.5% coupon and priced at 99.209 to yield 4.65%, the 2024 bonds have a 4.75% coupon and priced at 98.814 to yield 4.90%, and the 2029 bonds have a 5% coupon and priced at 98.435 to yield 5.15%.

Proceeds will be used to refund existing debt issued for improvements to United Airlines terminals at the Houston George Bush Intercontinental Airport.

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