Tax-exempt yields slide, but demand stronger than supply; North Carolina, Wichita bring issues

By Sheri Kasprzak

New York, Aug. 17 - Tax-exempt municipal yields have consistently slid since April, influenced greatly by a strong Treasury market and supply-demand dynamics, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

Ten-year, AAA-rated municipals slid once again on Tuesday to 2.36%, said one trader. Twenty- and 30-year munis are also poised to reach record-low yields.

"Overall, new issue supply has been flat with 2010 expected to finish about where 2009 ended - $410 billion - but the taxable-to-tax-free mix has changed dramatically," Schankel said.

"With the advent of Build America Bonds in April 2009, taxable bonds, which had traditionally accounted for less than 10% of municipal issuance, jumped to a quarter or more of the market. BABs brought in new buyers including domestic pension and retirement accounts, as well as non-U.S. buyers. But the net result was fewer new tax-free issues, with volume of new tax-frees for 2010 expected to be the lowest in 10 years."

Even though demand has been "robust," Schankel said, supply has not.

"Inflows to tax-free mutual funds are one proxy for demand, and they've had a very strong year. Crossing the $500 billion mark earlier this year, assets are at an all-time high point," Schankel noted.

"Weekly inflows after slipping during tax season are approaching the strong levels of the first quarter. Long-term tax-free yields are nearing historical lows, but investors continue to seek tax-frees. With inflation running at the lowest level in years, and whiffs of disinflation or even deflation in the air, a 3% or 4% tax-free yield, with a positive real return, is more palatable than it would have been a year or more ago."

North Carolina sells

Amid the heavy primary calendar, the State of North Carolina priced $476.235 million in series 2010B general obligation refunding bonds on Tuesday, said a pricing sheet.

The bonds (Aaa/AAA/AAA) were sold competitively with Bank of America Merrill Lynch winning the bid with a 1.7% true interest cost.

The bonds are due 2011 to 2019 with 5% coupons across the board.

Proceeds will be used to refund existing debt.

Ohio deal prices

Also during the day, the Ohio Building Authority priced $202.35 million in series 2010 state facilities refunding bonds through Morgan Stanley & Co. Inc., said a term sheet.

The sale included $72.15 million in series 2010A adult correctional building refunding bonds, $115.85 million in series 2010C administrative building fund projects refunding bonds and $14.35 million in series 2010D juvenile correctional building fund projects refunding bonds.

The 2010A bonds are due 2012 to 2024 with coupons from 2% to 5%. The 2010C bonds are due 2012 to 2024 with coupons from 3% to 5%. The 2010D bonds are due 2013 to 2024 with coupons from 2.25% to 5%.

Proceeds will be used to refund bonds issued to finance the construction of administrative, adult correctional and juvenile correctional building projects.

Wichita bonds price

In other news, the City of Wichita, Kan., sold $188.805 million in series 2010 G.O. bonds and notes on Tuesday, said a term sheet.

The sale included $21.42 million in series 2010A sales tax refunding bonds, $27.385 million in series 2010B refunding bonds and $140 million in series 240 G.O. improvement temporary notes.

J.P. Morgan Securities Inc. won the bid with a 0.41% TIC.

The 2010A bonds are due 2012 to 2019 with coupons from 2% to 3%. The 2010B bonds are due 2011 to 2018 with coupons from 3% 4%. The series 240 bonds are due Sept. 15, 2011 with a 0.45% coupon priced at 100.099.

The city plans to use the proceeds to refund its outstanding series 768, 770, 772, 773 and 774 bonds and to provide temporary financing for improvements to the water system aquifer storage and recovery project.

N.J. hospital bonds sold

Elsewhere, the New Jersey Healthcare Facilities Financing Authority sold $128 million in series 2010 refunding revenue bonds for Robert Wood Johnson University Hospital, said a pricing sheet.

The bonds (A2/A-/) were sold through JPMorgan.

The bonds are due 2011 to 2022 with term bonds due 2025 and 2031. The serial coupons range from 2% to 5%. The 2025 bonds have a 4.375% coupon priced at 98.973. The 2031 bonds have a 5% coupon priced at 101.480.

Proceeds will be used to refund the authority's series 2000 bonds and to make a deposit to a debt service reserve fund.

The hospital is located in New Brunswick, N.J.

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