Municipals hold steady; volume expected at $3.5 billion, marking slowest February in 14 years

By Sheri Kasprzak

New York, Feb. 24 - Municipals rounded out Monday mostly flat as the market prepared for another slow week of new issuance, said market insiders.

Secondary activity remained light throughout the session, and primary action was scarce, leaving little to move yields. In fact, municipals didn't respond to a slight dip in Treasuries ahead of auctions. The 10-year Treasury note yield rose by 1.5 basis points to close at 2.748%, and the five-year note yield climbed by 1.5 bps to 1.549%. The 30-year bond yield rose by a basis point to end at 3.707%.

Meanwhile, new issue volume for the week is expected to be $3.5 billion, bringing February's total to about $15 billion, and that would make it the slowest February in 14 years, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

"Lack of supply is an element underlying the strong municipal rally characterizing the start to 2014," Schankel said Monday.

"Demand measures have also improved as mutual fund flows, strongly negative for most of the year, have been tracking modestly positive thus far in 2014."

The MMA's 10-year tax-free benchmark yield is 2.52%, 27 bps lower than the end of 2013. The 30-year index yield is 32 bps lower at 4.09%.

Inland Valley deal set

Among the larger offerings set for the week, the Inland Valley Development Successor Agency of California plans to price $270 million of series 2014 tax allocation refunding bonds.

The offering is expected by some market insiders to be a major test of market appetite for California TABs since the state dissolved redevelopment agencies in February 2012.

The bonds (/A-/) will be offered through Barclays.

The deal includes series 2014A tax-exempt bonds and series 2014B taxable bonds.

Proceeds will be used to repay outstanding loans and refund the agency's series 2011B-C bonds.

Puerto Rico yields lower

Following a rash of rating downgrades, Puerto Rico yields moved lower. Puerto Rico's 5% G.O. bonds due 2041 saw no block trades Friday, but $2.5 million printed at 7.6% Thursday, said Schankel.

Spreads have contracted on G.O. bonds between 25 bps for 10-year maturities and 75 bps for 30-year maturities ahead of a planned $2.8 billion G.O. bond offering.

Fitch: Detroit plan 'troubling'

In light of a recent proposal from the City of Detroit that would severely cut pension benefits to city employees and health benefits for retirees, Fitch Ratings released a report Monday that said the plan would "set a troubling precedent in the municipal market."

"The plan not only classifies unlimited tax general obligation bonds as 'unsecured' but further degrades ULTGO value by giving other similarly classed 'unsecured' creditors preferential treatment, including unfunded pension and retiree health-care liabilities," wrote Fitch analysts Arlene Bohner, Amy Laskey and Jessalynn Moro.

"The city's choice to treat ULTGO bonds as unsecured is particularly concerning, as they are backed by a separate property tax approved by the voters for the sole purpose of paying debt service on the bonds."

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