Munis close firmer as investors head to secondary; Illinois set to price competitive offering

By Sheri Kasprzak

New York, Jan. 4 - Municipals rebounded after taking a hit on Tuesday, thanks in part to healthy demand. Given the lack of primary activity, investors headed over to the secondary market, where there was a glut of bonds because of recent new issues.

"[Primary] supply is really light, but the demand is still heavy," noted one trader reached during the afternoon.

"There has been a significant amount of interest in secondary. Trading volume is up."

Ten-year yields were down by more than 6 basis points, and two-year yields were down nearly 5 bps. Longer maturities were a bit softer, however, with 30-year yields up more than 2 bps and 20-year yields up by a basis point.

Illinois prepares $800 million

Although the week won't offer much in the way of new issues, it will bring at least one major offering. The State of Illinois is on deck to sell $800 million of series 2012 general obligation bonds (A1/A+/A) competitively.

The bonds will fund transportation, school, state facilities and other capital projects.

The deal includes $525 million of series 2012A bonds and $275 million of series 2012B taxable bonds. Both series of bonds are due 2013 to 2037.

The offering, said Alan Schankel, managing director with Janney Montgomery Scott LLC, will test the market.

Even though the state had a large tax increase to begin the year, Illinois remains behind financially, said Schankel. The funded pension ratio for fiscal year 2011 slipped to 43% from 45% in fiscal year 2010.

"Based on recent CDS trades, it costs 285 basis points to buy Illinois default protection, compared to 234 bps for California," Schankel said.

Ten-year munis return 10.6%

On a broader note, Schankel reported Wednesday that in 2011, 10-year tax-free municipals returned 10.6%, well above the 6.6% average for the past 29 years.

"Despite doom and gloom prognostications of Meredith Whitney and others just over a year ago, the core municipal sector of tax-backed and water and sewer revenue issuers finished the year with uncured defaults of only $70 million across six issuers," he said.

"Total default statistics also included $3.5 billion in municipal debt backed by American Airlines, now in bankruptcy."

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