Municipals rally, 30-year yields fall almost 21 bps; Illinois sells $800 million of G.O. bonds

By Sheri Kasprzak

New York, Jan. 11 - Municipals closed out another session with a rally, with 30-year yields down by nearly 21 basis points. Supply continued to come in, meeting a hungry investor base eager to snap up the offerings as quickly as they price.

"Demand is still extremely good, and that is driving the market right now," said one trader.

Twenty-year bonds were also firmer, though not as dramatically better as the 30-year yields. The 20-year yields were seen down by more than 13 bps.

Meanwhile, government bonds edged out the returns of the stocks of large U.S. companies, said James Klotz, president of FMS Bonds Inc., reporting the results of Ibbotson Associates' SBBI bond index.

"The edge was modest," Klotz said.

"Ibbotson's SBBI bond index, a broad measure of government bonds, returned 11.03% per year on average over the past 30 years, compared with a 10.98% return on the stocks of large U.S. companies."

In 2011, the SBBI index returned 28% while the S&P 500 was mostly unchanged.

Municipals, Klotz said, had their best year since 2009, outperforming stocks, Treasuries, corporate debt and commodities.

"Tune into the financial channels and there's little talk of the advantages of bonds and their steady stream of income," Klotz noted.

"Typically, the chatter focuses on the thrills and chills of stock market gyrations, which offers more exciting theater and endless fodder for debate, if not a skewed view of prudence for individual investors. And when attention is directed to the municipal bond market, the talk is usually dominated by two strains of thought: Wait for interest rates to rise and be careful of the imminent Armageddon in the muni market."

Bonds, Klotz concluded, are not an alternative to stocks but should be an integral part of a diversified portfolio.

Florida DOT gets good response

Meanwhile, the Florida Department of Transportation's offering of $243.79 million of series 2012 bridge construction and right of way acquisition bonds that priced on Tuesday "saw a strong response, with most bonds sold to end accounts immediately after sale," said Alan Schankel, managing director with Janney Montgomery Scott LLC.

"The elevated appetite for high quality munis continues, with little new issue supply to accommodate the demand."

The bonds (Aa1//AAA) were sold competitively with Bank of America Merrill Lynch winning the bid.

The bonds are due 2012 to 2037 with a term bond due in 2041. The serial coupons range from 2.5% to 5%. The 2041 bonds have a 4% coupon and priced at par.

Proceeds will be used to finance the cost of acquiring real property or the rights to real property for state roads as well as to finance the cost of bridge construction. The bonds will also be used to refinance outstanding right of way bonds.

Illinois sells $800 million

Heading up Wednesday's primary action, the State of Illinois priced $800 million of series 2012 general obligation bonds (A2/A+/A), said a pricing sheet.

The deal included $525 million of series 2012A tax-exempt bonds and $275 million of series 2012B taxable bonds.

The bonds received a good response despite the fact that Moody's Investors Service cut the state's G.O. debt to A2 from A1, citing the state's chronic late bill payments and severely underfunded pension obligations.

"Clearly, there's still demand despite the downgrade," said a sellsider when asked about the response to the offering.

"The returns have generally been good in the past. There's a certain type of investor that will go for Illinois bonds no matter what."

The 2012A bonds are due 2013 to 2037 with 3% to 5% coupons. The 2012B bonds are due 2013 to 2028 with a term bond due in 2037. The serial coupons range from 0.75% to 5.55%. The 2037 bonds have a 5.75% coupon and priced at 99.864.

The bonds were sold competitively. Wells Fargo Securities LLC won the bid for the tax-exempt bonds, and J.P. Morgan Securities LLC took the taxable bonds.

Proceeds will be used to fund transportation, school, state facilities and other capital projects within the state.

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