Munis little changed amid light volume; California's budget is positive for state, Fitch says

By Sheri Kasprzak

New York, May 17 - Municipal yields were flat on Friday with sluggish new issue volume and light trading activity, said market sources.

"It's a very quiet day," a source said.

In the larger market, municipals continue to be a good investment, said Tom Kozlik, municipal credit analyst with Janney Montgomery Scott LLC.

"The 10-year municipal-to-Treasury ratio is typically referred to as at an 'attractive' level when it is (at least) over 100% or when the 10-year municipal AAA yield exceeds the 10-year Treasury," Kozlik wrote Friday.

"For months now, M/T ratios have been on the attractive side, or over 100%. But at the beginning of the month, on May 3, the M/T dipped slightly below 100% for only the third time since the middle of March. The M/T ratio is currently at 98% with the 10-year AAA MMD at 1.75% and the Treasury around 1.78%."

The current M/T ratios are equal to the three-month average, and ratios will likely move between 95% and 100% throughout the summer, said Kozlik.

Janney Montgomery Scott's expectation is that "volume, which generally picks up in the summer months (especially in June), will continue to be controlled by a strong demand-side bid driven by rising trends of flows into municipal funds and the reinvestment of redemptions, for example," Kozlik wrote.

Market isn't at all-time low

Another thing making municipals attractive now is the fact that they haven't hit all-time lows, said Kozlik.

"The market is not at an all-time low, it is actually just below the long-term average," Kozlik said.

"Although we did not make a market prediction and are not necessarily doing so here either, we should remind you that yields actually fell between 2011 and today, despite the expectation that rates would move higher."

California budget positive

Meanwhile, the State of California's fiscal 2014 budget released by Gov. Jerry Brown on Tuesday is a positive for the state, Fitch Ratings analysts wrote Friday.

The budget proposes a "prudent revenue forecast and restrained spending growth," senior directors Douglas Offerman and Rob Rowan wrote.

"In March, Fitch recognized the improvement in California's fiscal management by revising the rating outlook on the state's A- rated G.O.s to positive, noting at the time that rating improvement would be contingent on sustained budgetary discipline.

"State revenues and cash flow have benefited from very strong personal income tax collections since January 2013, as taxpayers accelerated income into 2012 ahead of the 2013 federal rate increases. In our view, the proposed budget responsibly assumes that the PIT gain is a one-time shift of collections from fiscal 2014 into fiscal 2013."

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