Municipals close flat; volume for first eight weeks of 2011 drops to lowest level in 10 years

By Sheri Kasprzak

New York, Feb. 28 - Municipals closed out the month of February mostly unchanged but with a firmer tone, market insiders reported.

"There's a sense of firmness still," said one trader.

"That firmness from last week is still lingering a bit today, but yields aren't moving that much. Looks like another quiet week."

Meanwhile, January was a historically low month for new issue volume with February shaping up to be nearly as slow, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

Schankel said Monday that there was $12.1 billion of new issuance in January, the slowest month in more than 10 years.

"Money continues to move out of tax-exempt mutual funds, although the pace is slowing, with February averaging $1.4 billion per week compared to $3 billion on average in the 11 weeks prior," Schankel said.

"To gain perspective, it's useful to consider the strong inflows of 2009 and 2010, which took place in an environment of ultra-low short-term interest rates and scary equity markets. Much of the money flowing into tax-free funds was the result of yield chasing and equity avoidance."

By comparison, equity markets have been strong, and many sellers of muni funds are moving into equities, Schankel pointed out.

Even so, muni yields have fared well over the past couple of weeks, mostly thanks to light issuance.

"The question remains - what happens when volume picks up? Predictions of municipal new issuance for 2011 have ranged from around $350 billion, well below 2010's record $432 billion, but since about 25% of last year's deals were taxable BABs, tax-free issuance in 2011 could actually exceed 2010 levels if projections are correct," Schankel said.

"Many issuers and underwriters have postponed borrowing until markets stabilize."

California, others halt deals

Schankel noted that California, one of the most prolific muni issuers, has said that it will issue no more debt until July, when the new fiscal year begins. On the other hand, Illinois Gov. Pat Quinn is seeking legislative approval to issue $8 billion of tax-free debt to pay off vendors.

"It is inevitable that volume will pick up in the coming months, and when it does, we expect some pressure on ratios and opportunity for both crossover buyers and long-term investors," Schankel said.

Louisiana leads primary

Moving to the week's primary offerings, the State of Louisiana will headline with its planned $300 million sale of series 2011A general obligation bonds (Aa2//AA).

The bonds are slated to price competitively Tuesday and are due 2011 to 2030.

Proceeds will be used to fund general government, veterans' affairs, elected officials economic development, culture, recreation, tourism, corrections, public safety, hospitals, education, legislative and non-state entities expenses.

Puerto Rico preps sale

Looking ahead, the Commonwealth of Puerto Rico announced plans Monday to price $250 million of series 2011C public improvement refunding bonds. Pricing could take place as early as Tuesday, according to a sellside source.

"It's a market that definitely has its own buyers," the sellsider said about the issuer.

"I would expect more yield-chasing investors, mostly institutional, but that doesn't mean retail won't bite. It should go well. With yields as attractive as they are, it will go well."

The bonds (A3/BBB-/BBB+) will be sold through senior managers Morgan Stanley & Co. Inc. and Barclays Capital Inc., said a preliminary official statement.

Proceeds will be used to refund existing debt.

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