Municipal yields end week unchanged; new issue calendar for week ahead stands at $6.7 billion

By Sheri Kasprzak

New York, May 11 - Yields on municipals were largely unmoved Friday as the market struggled to find direction, said traders reached during the session.

"There's little activity [in secondary]," said one trader. "It's been a quiet day."

Looking to next week's activity, Alan Schankel, managing director with Janney Montgomery Scott LLC, said the new issue calendar could bring about $6.7 billion of new deals.

The week will be led by a $597 million sale of general obligation bonds from the City of Chicago. The (Aa3/A+AA-) bonds will be sold through senior manager Mesirow Financial Inc., and proceeds will finance city improvements including lighting, street, right-of-way, alley and sidewalk improvements.

"Strong demand for munis continues, evidenced by the reception received by Chicago water and continuing inflows to municipal mutual funds, which topped $1 billion in the week ending May 2, bringing total new money totals for 2012 to $20 billion," Schankel wrote Friday.

Elsewhere in the broad market, the yield spread differential between high-yield and investment-grade municipals has narrowed by about 60 basis points since the end of the year to 341 bps, said J.R. Rieger, vice president of fixed income indexes with Standard & Poor's.

"The last time the spread differential was nearly this low was December 2010," Rieger wrote Friday.

"The spread narrowing indicates the market is willing to take on more risk for higher yield."

High-yield munis outpace

Investors do seem to be flocking to high-yield municipals, and high-yield munis outpace the overall muni market, returning more than 8.5% year to date, said Rieger. Those figures are measured by the S&P Municipal High Yield index.

"Over the past 12 months, high-yield municipal bonds have returned 17.99% as compared to 12.62% for investment-grade municipal bonds," Rieger wrote.

Meanwhile, tax-exempt investment-grade munis, as measured by the S&P National AMT-Free Municipal Bond index, have returned 3.75%. This is due in part to the fact that mutual funds continue to see inflows and new issue supply remains low compared to historical levels.

Puerto Rico debt burden grows

Elsewhere, the Commonwealth of Puerto Rico's debt might be growing faster than the rest of the market, said Rieger.

"Most municipal bonds from Puerto Rico benefit from tax exemption at the local, state and federal level for investors, making them attractive to individual investors and for use in state-based municipal bond funds," Rieger wrote.

"However, the debt burden seems to be growing faster than the rest of the market as measured by the S&P Municipal Bond index."

Chicago yields drop 13 bps

In other news, Chicago saw yields on its $399.59 million of series 2012 senior lien water revenue project and refunding bonds drop by as much as 13 bps, said Schankel.

The bonds (Aa3/AA-/AA) are due 2016 to 2032 with term bonds due in 2037 and 2042. The serial coupons range from 4% to 5%. The 2037 bonds have a 4% coupon and priced at 100.593, and the 2042 bonds have a 5% coupon and priced at 111.645.

"Despite modest market weakness, the $400 million Chicago water issue repriced to yields as much as 13 bps below initial levels with an order book reported at $3 billion," Schankel said in a report released Friday.

The offering was also downsized from $435 million.

The bonds were sold through Siebert Brandford Shank & Co. LLC.

Proceeds will be used to finance capital improvements and extensions to the water system and to refund existing debt.

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