Munis close out firmer; Kentucky Asset/Liability brings $269.82 million; Louisiana deal ahead

By Sheri Kasprzak

New York, Feb. 24 - Municipal yields were seen firmer again on Thursday as Treasuries continued to improve and supply remained light.

Tensions in the Middle East continue to drive Treasury yields lower, which is pushing muni yields down as well, said one trader reached during the session.

"It's going to be interesting to watch over the next few months," he said.

"Treasuries are improving, we're improving, and supply is going to stay very light for the foreseeable future."

Still, trading is relatively light with some spotty activity, said the trader.

"It's going to take a while, and maybe even lower yields, to draw back retail and really get that portion of the market to realize that we're not collapsing."

On Wednesday, municipals even outperformed Treasuries, said Alan Schankel, managing director with Janney Montgomery Scott LLC, with most gains seen in the belly of the curve as far out as 20 years.

Even so, mutual funds are still dumping tax-free municipals, with $1.5 billion of redemptions seen during the week ended Feb. 16, Schankel said.

"According to numbers released by ICI, taxable fixed-income funds gained $1.5 billion in new money and equity funds grew by $6.4 billion, leaving munis as the only category to lose assets," he said.

Not all doom and gloom

Despite all the gloomy news surrounding the municipal markets, Schankel pointed to three Florida issuers highlighted by Moody's for maintaining solid fiscal footing despite financial challenges.

Port St. Lucie (Aa2/AA-/AA-), according to the Moody's report, experienced a three-year decline in its tax base and its property tax revenues but maintained a "solid cash and general fund balance position" by utilizing expenditure control, small tax increases and reserves.

Cape Coral (Aa3/A/AA-) was another city that experienced declines in revenues, but it implemented a 67% tax rate increase during fiscal year 2010. Along with expenditure reductions, the move will generate a $9.7 million surplus once full-year 2010 numbers are released.

Lee County built reserves during its boom times to help get through the current downturn. The county's 2009 fund balance, Schankel said, was $277 million, equal to about 64% of revenues, which allowed the county to use $60 million in 2010 as an offset to declining tax revenues.

"These three communities were relatively strong when the downturn began and managed well through the tumult," Schankel commented.

Kentucky bonds price

In Thursday's primary action, the Kentucky Asset/Liability Commission brought $269.815 million of series 2011 general fund first series taxable funding notes, said a term sheet.

The notes (Aa2/A+/AA-) were sold through J.P. Morgan Securities LLC.

The notes are due 2012 to 2019 with a term bond due in 2022. The serial coupons range from 1.688% to 5.039%, all priced at par. The 2022 bonds have a 5.339% coupon priced at par.

Proceeds will be used to refinance debt service savings internal loans from the Kentucky Teachers' Retirement System that covered retiree medical benefits over a period beginning in 2005.

Louisiana preps deal

Looking to the coming week, the State of Louisiana is poised to headline with its $300 million sale of series 2011A general obligation bonds (Aa2//AA).

The bonds are set to price competitively on Wednesday and are due 2011 to 2030.

Proceeds will be used to fund general government; veterans' affairs; elected officials; economic development; culture, recreation and tourism; corrections and public safety; hospitals; education; legislative; and non-state entities expenses.

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