Municipals get boost from Treasury rally following FOMC meeting; Detroit likely to default

By Sheri Kasprzak

New York, Sept. 18 - Municipals rallied on Wednesday along with much-improved Treasuries, market sources said, following the September meeting of the Federal Open Market Committee.

Ten-year municipal yields were seen lower by 5 basis points, said a market source, as the 10-year Treasury yield shrank by 16 bps.

The Treasury rally came courtesy of the Fed's announcement on Wednesday that it will hold off on tapering its bond purchasing program and will continue at its $85 billion-a-month pace, which includes $40 billion of agency mortgage-backed securities and $45 billion of longer-term Treasury securities.

Detroit likely to default

Moving to distressed news, the City of Detroit is expected to default on its unlimited tax general obligation bonds and limited tax G.O. bonds on Oct. 1, according to a report released Wednesday by Fitch Ratings.

"Fitch began signaling concern about Detroit with its rating actions in 2005, and the bankruptcy was not unexpected," wrote Amy Laskey, managing director with Fitch.

"Detroit's economy has been on [the] decline for decades, management has exhibited an unusual lack of cohesion and positive action, and fixed costs have been growing."

Fitch believes the G.O. debt will not be paid as due on Oct. 1.

"If the Oct. 1 debt service payment is missed, Fitch will downgrade both the ULTGOs and LTGOs to D," the report said.

"The emergency manager's decision to treat ULTGO and LTGO bonds and post-employment benefit payments as a single class of creditor is at odds with Fitch's prior expectations."

G.O. debt will be effectively subordinated if pension benefits are not subject to adjustment in Chapter 9, something that causes concern for the ratings agency.

"If the Detroit case signals a shift towards lumping these obligations together and not levying taxes to support the apparently affordable ULTGO debt already approved by taxpayers, the outcome will lead Fitch to reconsider the impact on ratings," Laskey wrote.

Massachusetts sells notes

Leading Wednesday's more-subdued primary calendar, the Commonwealth of Massachusetts brought $550 million of series 2013 G.O. revenue anticipation notes. The offering was downsized from $800 million.

The deal included $50 million of series 2013A notes, downsized from $200 million; $200 million of series 2013B notes, downsized from $300 million, and $300 million of series 2013C notes.

The 2013A notes are due April 24, 2014, have a 2% coupon and priced at par for a yield of 0.04%.

The 2013B notes are due May 29, 2014, have a 2% coupon and priced at par for a yield of 0.05%.

The 2013C notes are due June 26, 2014, have a 2% coupon and priced at 101.459 for a yield of 0.06%.

The notes (MIG 1/SP-1+/F1+) were sold competitively. The overall true interest cost for the notes came in at 0.544%, a record low for the commonwealth. The issuer did not immediately respond to requests for the winning bidder Wednesday.

According to a market source, the offering drew 20 bidders who placed 120 bids for the deal.

Proceeds will be used to finance certain capital requirements for the commonwealth ahead of the collection of revenues during the 2014 fiscal year.

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