Munis close unchanged ahead of subdued new-issue supply; Puerto Rico debt headwind for market

By Sheri Kasprzak

New York, March 30 – Municipals were largely unmoved on the day Monday to start a holiday-shortened week that offers slightly less in terms of supply, market insiders said. About $8 billion of new offerings will price this week before the market shuts down for Good Friday.

Yields were mostly flat to end the session, ignoring a mixed Treasuries market as the first quarter comes to a close. Stocks rallied on the day, pressuring some Treasuries.

Meanwhile, investors will have a few large deals to pick from in the short week, led by a $765 million sale from the California Department of Water Resources, which is on tap to bring power supply bonds.

Also out of the utilities sector, the Illinois Municipal Electric Agency is ready to price $582,495,000 of power supply bonds through Citigroup Global Markets Inc. on Tuesday. Those bonds (A1/A/A+) will refund its series 2006 and 2007A power supply revenue bonds.

Puerto Rico a ‘headwind’

Elsewhere during the day, J.R. Rieger, global head of fixed income at S&P Dow Jones Indices, said in a note that Puerto Rico could be a headwind for the municipals market for the rest of 2015.

“This is an ugly and complex situation that is likely to lead to some massive defaults of Puerto Rico revenue bonds,” Rieger said in the note.

“State bond funds with Puerto Rico bond exposure are impacted on two fronts: bond prices falling and possible lack of liquidity when and if they decide to sell the bonds.”

New Jersey and Illinois could also be headwinds for the market, he added, noting that those states have large pension shortfalls.

He also sees rising interest rates as a challenge for the market as yields rise.

Tailwinds for the market, he said, will likely including comparative yield with less duration risk.

“Relative to other investment-grade fixed-income asset classes, investment-grade municipal bonds still provide comparative yield when viewed from the taxable equivalent perspective,” he wrote.

“Using a 35% tax rate, the taxable equivalent yield on the S&P National AMT-Free Municipal Bond Index is 2.91% while the yield of taxable bonds in the S&P U.S. Investment Grade Corporate Bond Index is 2.81%.”

Rieger also noted that there’s value to be found in the belly of the curve.

“On a nominal yield basis, a diversified basket of non-callable investment-grade bonds tracked in the S&P AMT-Free Municipal Series 2020 Index have a higher yield than the five-year U.S. Treasury bond,” he said.

“The same is true for the S&P AMT-Free Municipal Series 2024 Index versus the 10-year U.S. Treasury bond yield.”

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