Munis close mostly flat as short bonds struggle; high-grade funds underperform 2013 benchmarks

By Sheri Kasprzak

New York, March 21 - Despite a rebound for Treasuries, municipals were mostly flat on Friday after the short end of the curve struggled and high-grade names reportedly saw yields rise early in the afternoon, traders said.

"A lot of triple-A names were trading higher, but we seem to be leveling off now," a trader said in the late afternoon.

"Short bonds were having a lot of trouble, possibly following short Treasuries, but trading is tapering, and we're really just waiting to see how supply pans out for the coming week."

New issuance in the week ahead is estimated at a still-subdued $5 billion pace.

High-grade funds underperform

On Friday, J.R. Rieger, global head of fixed income at S&P Dow Jones Indices, released a report indicating that nearly all high-grade bond funds underperformed their 2013 benchmarks.

"The compression in yields across the spectrum of high-grade bonds may be a key driver of that result," Rieger wrote.

"During the more volatile time period, over 90% of long high-grade funds did not beat the index."

On the other hand, 68% of high-yield funds failed to outperform their 2013 benchmarks.

"This is indeed an improvement over the three- and five-year time period where over 87% and 91% of high-yield bond funds failed to outperform their benchmark," Rieger noted.

"Bond selection based on duration and quality appears to remain a key driver for the performance of these funds."

The year was "challenging" for the municipals market, said Rieger.

"Over 61% of investment-grade municipal bonds funds failed to outperform their benchmark in 2013," he wrote.

Among the worst underperformers were California and New York, he noted.

California PWB deal set

Heading up the week's primary activity, the California State Public Works Board is slated to bring $793 million of Department of Corrections and Rehabilitation revenue bonds (A2/A-/A-) through Morgan Stanley & Co. LLC and Wells Fargo Securities LLC.

The board will use the proceeds to finance the construction of the Mule Creek State Prison and the Richard J. Donovan Correctional Facility.

Atlanta plans to price $705.57 million of general revenue bonds through Siebert Brandford Shank & Co. LLC and SunTrust Robinson Humphrey.

The deal includes $376.37 million of series 2014A non-AMT passenger facility charge and subordinate-lien general revenue refunding bonds, $144.14 million of series 2014B non-AMT airport general revenue refunding bonds and $185.06 million of series 2014C AMT airport general revenue refunding bonds.

Proceeds will be used to refund the airport's series 2004B, 2004C and 2004J general revenue bonds.

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