Municipals cheapen; Fitch says state FY2014 budgets anticipate continued economic recovery

By Sheri Kasprzak

New York, May 29 - Municipal yields were seen cheaper again on Wednesday as price discovery remained challenging, market sources reported. Treasuries were firmer, but municipals caught pressure from both the primary and secondary sides.

Bid/ask spreads continued to widen, traders reported, and new deals had some difficulty during the session as well.

"It's one of those days where it's coming from both sides," a trader said in the early afternoon.

"New deals are having a rough go, and widening bid/ask spreads are giving secondary a tough time."

L.A. college bonds price

Heading up the day's primary action, the Los Angeles Community College District of California came to market with $305.7 million of series 2013 general obligation bonds, said a pricing sheet.

The bonds (/AA/) were sold competitively.

The deal included $250 million of election of 2008 series F bonds and $55.7 million of series 2013 G.O. refunding bonds.

The election of 2008 bonds are due 2013 to 2035 with a term bond due in 2037. The serial coupons range from 2% to 5%, and yields range from 0.13% to 3.87%. The 2037 bonds have a 4% coupon and priced at par.

The 2013 bonds are due 2013 to 2027 with coupons from 2% to 5% and yields from 0.15% to 3.10%.

Proceeds will be used to finance classroom, laboratory and equipment improvements and to refund existing bonds.

Economic recovery seen

U.S. state fiscal-year 2014 budgets foresee continued economic and revenue recovery, Fitch Ratings analysts said in a report Wednesday.

This news comes in spite of uncertainty about federal government funding and health-care reform.

"State tax collections have grown for 12 straight quarters based on Census Bureau data through December 2012, with Fitch observing continued growth since then," wrote Laura Porter, managing director with Fitch.

"Although the pace of growth has slowed since 2011, fiscal 2013 results so far are generally in line with, or exceeding, budget expectations. Most state budgets assume sustained, slow economic and revenue gains for the current and coming fiscal years."

The end of the federal payroll tax holiday is one factor in the sluggish sales tax growth experienced in many states over the past several months, the analysts wrote.

Meanwhile, sequestration seems to be having a limited effect on the economic performance and finances of states. Many of those states are choosing not to replace funding for federal programs.

"However, Fitch believes that states remain significantly exposed to the possibility of future federal funding cuts," the analysts wrote.

"Cuts would be most challenging if they affected Medicaid, which accounts for the majority of federal aid to the states and so far has been protected from automatic cuts."

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