Munis close flat to softer after Treasuries sell off; muni mutual fund flows positive for 2012

By Sheri Kasprzak

New York, Jan. 3 - Municipal yields were mostly unchanged to a touch weaker around 10 years as Treasuries engaged in a sell-off , said a trader reached during the afternoon.

"Treasuries were off, and we're not changed that much, so we're outperforming again today," the trader said.

The outperformance, the trader said, is driving municipal/Treasury ratios in 10- and 30-year maturities to below 95%.

Meanwhile, light supply continues to weigh on the market, said Alan Schankel, managing director with Janney Montgomery Scott LLC.

"After dramatic outflows in the prior week, municipal mutual [fund] flows lost an additional $685 million in the week ending Dec. 26, but total flows for 2012 were strongly positive, totaling $50 billion," Schankel said Thursday.

"With the 30-day visible supply of new issues hovering at a low $4 billion and an expected $16 billion of funds available in January from maturing bonds and pre-refunding redemptions, the technical balance is not unfavorable, despite recent fund outflows."

Uncertainty over tax exemption

Meanwhile, Schankel said Thursday that the short-term impact of the fiscal cliff patch on municipals is positive because the value of muni tax exemption is higher with a higher maximum bracket at 39.6%.

"Longer term, however, uncertainty continues because future spending reduction and/or tax reform could lead to measures reducing or eliminating the tax-free benefit, which in turn could impact bonds on a retroactive basis or just apply to new issues," Schankel said.

After Congress reached an agreement earlier this week on the fiscal cliff, municipals' tax-exempt status, which had been in question since late in 2012, was left untouched.

Orange County deal ahead

Although the next 30 days will provide only about $4 billion of supply, a few large deals are on the horizon. Orange County, Calif., announced Thursday that it will hit the market with $268.5 million of series 2013A taxable pension obligation bonds through J.P. Morgan Securities LLC.

The timing of the deal has not yet been determined, but the bonds (Aa3/A+/AA/F1+) are due 2013 to 2014.

Proceeds from the sale will be used to refund the county's series 2013 debenture, which was used to finance unfunded pensions for county employees.

Coming up next week, the Texas State University System is on deck to price $99,275,000 of series 2013 revenue financing system revenue and refunding bonds (Aa2//AA) through Barclays. The bonds are due 2013 to 2043.

Proceeds from the offering will be used to acquire, purchase, construct, improve, renovate, enlarge or equip property, buildings, facilities, roads and related infrastructure for members of the revenue financing system, to refund a portion of the system's outstanding series 2004 revenue and refunding bonds and to fund certain capitalized interest for the bonds.

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