Municipal bonds weaken as shutdown gets underway; impact on munis likely minimal, Fitch says

By Sheri Kasprzak

New York, Oct. 1 - Municipals followed along with Treasuries on Tuesday, which were only slightly impacted by the U.S. government shutdown that commenced at midnight, insiders said.

Yields were seen a basis point to 2 bps higher across the board, with short bonds taking the brunt of the weakness.

Comparatively, after the shutdown, the five-year Treasury note yield rose by 4 bps to close out the session at 1.424%, and the 10-year note yield climbed by 3.5 bps to 2.646%. The 30-year bond yield ended the session higher by 2.5 bps at 3.712%.

Fitch says impact minimal

The shutdown's impact on the municipals market will likely be minimal if the shutdown is short-lived, said Fitch Ratings in a report released Tuesday morning.

"The shutdown of U.S. government operations and services due to the political stalemate in Washington will have a minimal impact on U.S. municipal credits, provided the shutdown is short-lived, as expected," said the report.

"However, if extended, the impact of funding reductions will become more pronounced. If the stalemate carries over into inaction in lifting the debt ceiling mid-month, there could be broader disruptions in the financial markets and the pace of the economic recovery. These disruptions could negatively affect state and local governmental revenues and cause volatility in the valuations of public pension funds and endowments of not-for-profit entities, such as colleges and universities."

California debt service down

Elsewhere in the market, the State of California reported Tuesday that its debt service payments in fiscal year 2013-2014 will consume a smaller share of state general fund revenues than previously thought.

In a statement released by treasurer Bill Lockyer's office, debt service will equal 7.7% of general fund revenues in fiscal year 2013-14, down from the 9.8% ratio projected in the 2009 Debt Affordability Report.

Through fiscal year 2014-15, the state will issue $12.5 billion of bonds supported by the general fund, including $7.3 billion this fiscal year and $5.2 billion in fiscal year 2014-15. Voter-approved general obligation bonds will comprise $9.9 billion of that total.

Louisiana energy bonds price

In primary action Tuesday, the Louisiana Energy and Power Authority hit the market with $120.77 million of series 2013A power project revenue bonds, said a pricing sheet.

The bonds (A2/AA-/) were sold through Raymond James/Morgan Keegan.

The bonds are due 2017 to 2033 with term bonds due in 2038 and 2044. The serial coupons range from 3% to 5.25%. The 2038 bonds have a 5.25% coupon and priced at 102.268, and the 2044 bonds have a 5% coupon and priced at 98.452.

Proceeds will be used to finance the construction of a 64 MW combined cycle combustion turbine electric generating unit in Morgan City, La.

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