Municipal yields close mixed; muni market enters historically strong period on weaker note

By Sheri Kasprzak

New York, June 3 - Municipals closed out a light trading day on a mixed note, said a trader in the afternoon.

"Trading is light, and yields aren't moving much, but the overall tone is mixed," he said.

With Treasuries weakening, the market felt some pressure, but one of the week's largest offerings conducted its second retail order period on Monday.

The market seems to be waiting for the Commonwealth of Massachusetts' $1,115,260,000 offering of general obligation bonds (Aa1/AA+/AA+), said a market source. The state started its retail order period for the offering on Friday.

The offering will be conducted in three tranches through senior underwriter BofA Merrill Lynch, and proceeds from the deal will be used to finance capital projects as part of the commonwealth's five-year plan and to refund existing G.O. debt.

Ventura brings TRANs

Heading up the day's primary action, Ventura County, Calif., came to market with $140 million of series 2013-14 tax and revenue anticipation notes, said a pricing sheet.

The notes (MIG 1/SP-1+/) were sold competitively. Morgan Stanley & Co. LLC won the bid with a 0.18% true interest cost, said Paul Derse, the county's chief financial officer.

The notes are due July 1, 2014, have a 1.25% coupon and priced at par.

Proceeds will be used to finance capital needs for the county ahead of the collection of taxes and revenues.

"No, the county is not required to go competitive," Derse said in an interview Monday.

"We decided to go competitive based upon our past success in this format, our good credit rating and being a known name in the market."

$6 billion week

In the week's primary action, about $6 billion is expected to price, said Tom Kozlik, municipal credit analyst with Janney Montgomery Scott LLC.

Meanwhile, demand for municipals remains positive, at least in the form of mutual fund flows, Kozlik said Monday.

"For the week ending May 22, the Investment Company Institute reported $156 million of inflows to municipal mutual funds," he wrote.

"This was the second plus week in a row, but annual totals are falling further behind last year's accumulated amounts. So far we have seen $8 billion of inflows in 2013 versus $23 billion at this time in 2012."

June-July good time for munis

Although municipals are heading into a historically good period for municipals, the trend might be tested as the muni market enters June with a weaker tone, said Joseph Kay, senior vice president with RBC Wealth Management.

"The June-July period has historically been a good time for municipal bonds due to the large amount of coupon and principal payment reinvestment," Kay wrote in a report released Monday.

"This historical trend could be tested this year as the muni market is entering June with a decidedly weaker tone due to a bout of volatility in May created by the Fed's comments to potentially end ... its monthly large-scale asset purchases."

During May, Treasury yields jumped as much as 55 basis points, Kay noted, and municipal-to-Treasury ratios reverted to more normal levels. As a result, buyer interest vanished.

"Despite the prospects for continued near-term volatility and talk of a rotation out of low-yielding munis into higher-yielding assets, we contend that the uptick in muni yields provides attractive opportunities for retail investors with funds to reinvest," Kay wrote.

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