Municipals close unchanged in light trading session; Illinois offers $1.03 billion G.O. bonds

By Sheri Kasprzak

New York, Feb. 6 - The municipals market yet again outperformed a struggling Treasuries market Thursday, closing mostly unchanged with some slightly weakness around 30 years, market sources reported.

Trading action was reportedly light, a trader said in the afternoon.

"The focus is really on primary with the Illinois G.O.s pricing, so trading is pretty light," the trader said.

Meanwhile, Treasuries took another dive ahead of much-anticipated jobs data expected Friday morning. The 10-year note yield rose over the session by 3.5 basis points to close at 2.702%, and the 30-year bond yield climbed by 2 bps to 3.673%. The five-year note yield rose by 3 bps to 1.518%.

Illinois brings G.O. bonds

Heading up the day's primary action, the State of Illinois dominated the market with its $1,025,000,000 offering of series of February 2014 general obligation bonds.

The bonds were sold through senior manager Citigroup Global Markets Inc.

The bonds are due 2015 to 2034 with a term bond due in 2039. The serial coupons range from 1% to 5.25%. The 2039 bonds have a 5% coupon and priced at 99.433, said a pricing sheet.

Proceeds will be used to finance capital development, transportation, school and job development projects within the state.

Puerto Rico tops headlines

After Standard & Poor's downgraded its G.O. debt to BB+ from BBB-, Puerto Rico remained the big news in the municipals market.

Moody's Investors Service and Fitch Ratings have announced that they could possibly downgrade the commonwealth to speculative grade.

The average yield on bonds in the S&P Municipal Bond Puerto Rico index remained unchanged at 7.44% since the start of the year, said a report released Thursday from Standard & Poor's Dow Jones Indices director Kevin Horan and vice president J.R. Rieger. Yields dropped as low as 7.19% on Jan. 24 but have climbed 25 bps since then. For the year to date, the index has a total return of 1.33%, helping offset its 2013 return of negative 20.46%.

In comparison, the S&P National AMT-Free Municipal Bond index has seen yields drop by 33 bps to 2.78% so far this year. High-yield munis, as tracked by the S&P Municipal Bond High Yield index, have seen a 2.89% positive return for the year to date with yields dropping by 30 bps during January to end the month at 6.46%.

According to Alan Schankel, managing director with Janney Montgomery Scott LLC, yield levels for Puerto Rico issuers have been stable in 2014. Just before the S&P downgrade, a $3 million block of Puerto Rico 5% G.O. bonds due 2041 traded at 8.01%, the lowest yield for that block size since November.

"We expect the downgrade to generate some downsize price pressure, and if Moody's and/or Fitch drop the rating to below investment-grade, that could add to the pressure, but we do not believe this market reaction to S&P's downgrade will be precipitous," Schankel wrote in a Puerto Rico report Thursday.

"Downgrade is already factored into trading levels, with most Puerto Rico debt trading as if it were already high-yield (perhaps lower than the BB category) since last summer."

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