Municipal yields rise by net 2 bps in September; market gears up for another big primary week

By Sheri Kasprzak

New York, Oct. 1 - Municipal yields have incurred a net rise of 2 basis points since the end of August, resulting in a slightly negative total return, James Rieger, vice president of fixed-income indexes at Standard & Poor's, said in a report released Friday.

"For the quarter, yields have seen a net drop of 21 bps, and since year-end, the average yield of this index has seen a drop of 37 bps. The S&P National Municipal [Bond] index has seen a year-to-date return of 7.35%."

Rieger said he tracks the10-year range for municipals using the S&P AMT-Free Municipal Series 2019 index.

"In September, the yield for this index rose or cheapened by 19 bps since to end at a 2.67%, resulting in a negative total return of over 1.3%," he said.

"The 2.67% tax-exempt weighted average yield of these nine-year municipal bonds is a higher yield than the 10-year Treasury bond yield. Also, the taxable equivalent yield of bonds in this index equates to a yield of 4.11%, or at a 35% tax rate, a similar taxable corporate bond would need to yield over 4.1% to net the bondholder the same return as these tax-exempt bonds."

The State of New York, Rieger said, has performed well.

"As measured by the S&P New York AMT-Free Municipal Bond index, the New York municipal bond market has seen a year-to-date total return of over 6.8%," Rieger's report said.

As credit spreads narrow, Rieger noted that high-yield municipals have benefited.

"[The] total return for the first three quarter of 2010 for the S&P/Investortools High-Yield Municipal Bond index has been just under 11.5%," Rieger said.

Taxable munis have not been immune to rising yields, Rieger pointed out in his report.

"The S&P Municipal Build America Bond Select index saw its average yield rise by 10 bps in September to record a negative total return of over 1.6%," Rieger's report said.

Yields close out week softer

Meanwhile, yields closed out the week on a softer note, with yields up by 2 to 3 bps as the market struggled to digest the massive primary supply from the past two weeks, traders reported.

"It's been a tough week for the market overall," said one trader.

"We're probably up 2, maybe even 3 bps in spots today. We've been inundated with new issues, and that really is shoving yields up."

Alan Schankel, managing director at Janney Montgomery Scott LLC, agreed that supply has put pressure on yields.

"Last week offered the first significant supply headwind the municipal market has seen since spring, and coming weeks will hold more of the same," Schankel said.

"Although supply continues to include many taxable Build America Bond issues, tax-free volume has also increased, putting upward pressure on yields. Tax-free mutual fund inflows, one proxy for demand, remain positive, but after several months of $1 billion-plus average weeks, new money to tax-free funds is running below a $600 million weekly pace in September. Muni-to-tax-free ratios wandered higher last week as weakening demand failed to keep pace with the new issue calendar."

N.J. bonds don't fare well

Even though some issuers have enthusiastically hit the new issue market with hopes of record-low pricing, not every issuer is faring so well. Schankel said the State of New Jersey had a hard time marketing its recent $697.01 million sale of series Q-S general obligation bonds from Thursday. Schankel pointed out that the state had to adjust yields higher at least twice during the marketing period.

"Although some of the adjustment reflected a weaker overall market, much was due to the state's finances," Schankel said.

"Moody's revised their outlook on the state from stable to negative citing, among other reasons, the state's relatively low level of funding for pensions. Credit spreads illustrate New Jersey's recent market woes."

The bonds (Aa2//AA) were sold through senior manager Morgan Stanley & Co. Inc.

The Q bonds are due 2013 to 2021 with 2% to 5% coupons. Yields ranged from 1.02% to 3.04%.

The R bonds are due 2014 and have a 2.02% coupon priced at par.

The S bonds are due 2013 and 2016 with 5% coupons and 0.97% and 1.9% yields, respectively.

Proceeds will be used to refund various existing G.O. bonds.

Dasny set to bring $1.3 billion

Looking to the week ahead, the Dormitory Authority of the State of New York is among several issuers with billion-dollar deals on the calendar. The authority plans to kick off the week with its sale of $1.363 billion in series 2010 state personal income tax revenue bonds Monday following a two-day retail order period, said a sales calendar.

The offering includes $554.515 million in series 2010E tax-exempt bonds, $61.275 million in series 2010F tax-exempt bonds, $149.5 million in series 2010G federally taxable bonds and $597.91 million in series 2010H Build America Bonds.

The 2010E and 2010F bonds will be sold through lead managers M.R. Beal & Co. and Bank of America Merrill Lynch. The 2010G and 2010H bonds will be sold through senior managers M.R. Beal, Bank of America and Siebert Brandford Shank & Co., LLC

Proceeds will be used to fund capital projects at the State University of New York and the City University of New York and fund economic development grants under a variety of state-run projects.

Detroit school bonds ahead

Coming up on Wednesday, the School District of the City of Detroit is set to price $210.54 million in series 2010 school building and site unlimited tax G.O. bonds, said a sales calendar.

The deal includes $160.91 million in series 2010A taxable direct-payment qualified school construction bonds and $49.63 million in series 2010B direct-payment Build America Bonds.

The bonds (Aa2/AA-/) will be sold on a negotiated basis with Siebert Brandford Shank and J.P. Morgan Securities LLC as the senior managers.

The district intends to use the proceeds to acquire land, construct new schools, remodel and expand existing schools, purchase and upgrade technology, develop outdoor athletic facilities and upgrade security measures.

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