Municipals close out week flat; California prices $2.6 billion G.O. offering for retail

By Sheri Kasprzak

New York, Sept. 16 - After a massive flood of new issues during the week, municipals closed out Friday mostly unchanged as the market prepared for another busy week of primary action, said market insiders.

Some firmness was found in the intermediate portions of the yield curve. Fifteen-year yields were improved by 2 basis points, said one trader. The rest of the market was flat.

"At this point, there's not a lot going on and everyone is waiting for next week," said the trader.

Meanwhile, some analysts have said that yields are too low to attract investors. J.R. Rieger, senior vice president of fixed-income indexes with Standard & Poor's, said in a report Friday that these comments are all relative.

"I've heard and read comments from some analysts who have said municipal bond yields are so low that they have become unattractive," Rieger wrote.

"My initial thoughts are that blanket statements like that are simply too broad. Unattractive relative to what? If you are looking for higher yields and willing to take on incrementally more risk in terms of default and term structure risk, then sure, those statements are easy to make."

As an example, Rieger noted that the S&P AMT-Free Series 2020 index yields 2.6% tax-free. The index tracks investment-grade, plain-vanilla municipal bonds due in June, July and August of 2020. The tax-exempt 2.6% yield is 124% of the yield on 10-year Treasury bonds as of Thursday, Rieger wrote.

"Converting that 2.6% tax-exempt yield to a taxable yield required for corporate bonds to net the same return results in a taxable equivalent yield of 4% using a 35% tax rate," Rieger noted.

"Now, let's make some comparisons. According to Standard & Poor's Securities Evaluations Inc., yields on AA-rated corporate bonds in the 10-year maturity range are about 2.75% for oil and technology companies, nearly 3% for retail companies and 5% for finance companies. So investment-grade municipal bonds yielding a 2.6% tax-free yield which results in a 4% taxable equivalent yield is actually not so unattractive."

California prices for retail

In primary news, the State of California released the details of its first retail order period for a $2.6 billion sale of general obligation bonds.

Yields on the $2.575 billion tax-exempt portion for the retail order period ranged from 1.13% to 4.8%. The bonds are due from 2015 to 2032 with a term bond due in 2041.

The $25 million taxable portion was not offered to retail investors. The state will conduct a second retail order period on Monday.

The bonds (A1/A-/A-) are slated to price on a negotiated basis next week with Bank of America Merrill Lynch and Stone & Youngberg LLC leading the syndicate.

Proceeds will be used to retire outstanding commercial paper notes and to refund debt.

Tom Dresslar, spokesman for the state treasurer's office, said Friday that retail pricing compares to the spread the state received on its November 2010 G.O. bond sale.

JEA sells debt

Elsewhere in the primary market, JEA of Florida sold $370.39 million of St. Johns Power Park System refunding revenue bonds, said a pricing sheet.

The bonds (Aa2/AA-/) were sold through J.P. Morgan Securities LLC.

The offering includes $360.99 million of issue 2, series 23 refunding revenue bonds and $9.4 million of issue 2, series 24 refunding revenue bonds.

The series 23 bonds are due 2013 to 2015 and 2017 to 2021 with 3% to 5% coupons. The series 24 bonds are due 2013 to 2015 and 2017 to 2019 with a term bond due in 2021. The serial coupons range from 3% to 4%. The 2021 bonds have a 4% coupon.

Proceeds will be used to refund the authority's series 17 and series 20 revenue bonds.

LIPA powers deal

In other pricing action, the Long Island Power Authority of New York priced $250 million of series 2011A electric system general revenue bonds, said a pricing sheet.

The bonds (A3/A-/A) were sold through Morgan Stanley & Co. LLC.

The bonds are due 2016 to 2021 with term bonds due in 2036 and 2038. The serial coupons range from 4% to 5%. The 2036 bonds have a 5% coupon and priced at 102.679, and the 2038 bonds have a 5% coupon and priced at 101.595.

Proceeds will be used to fund capital expenditures.

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