Municipals unchanged as activity grinds to halt; yields steady; Puerto Rico law proposed

By Sheri Kasprzak

New York, Dec. 23 - Municipals were mostly unchanged on Monday ahead of the Christmas holiday, market sources said, as new-issue activity was largely nonexistent.

New-issue activity is expected to be less than $100 million with no offerings larger than $50 million, insiders said.

Yields on Monday were mostly flat despite some weakness in the Treasuries market. Treasuries were still responding to the Federal Reserve's decision to pull back its bond-purchasing program to $75 billion a month in January from $85 billion a month. As a result, the 10-year note yield jumped by 4 basis points to close out the session at 2.929% and the 30-year bond yield climbed by 2 bps to 3.842%. The five-year note yield climbed by 1.5 bps to 1.698%.

Puerto Rico legislation eyed

Moving to Puerto Rico news, governor Alejandro Padilla proposed legislation to rescind the reduction in the sales tax rate scheduled for February 2014.

"As part of the revenue-raising package enacted in June, the base on which sales tax is collected was expanded, while the rate applied to the expanded base was lowered to 6.5% from 7.0%," said Alan Schankel, managing director with Janney Montgomery Scott LLC.

"The rate reduction was to come from the share of tax designated for municipals, reducing municipalities' slice [to] 1%. The governor's proposal would also allow municipalities, via the Puerto Rico Municipal Finance Authority, to issue long-term, Cofina-linked debt secured by its 1.5% portion of sales tax revenue."

Proceeds from the long-maturity bonds would be used to refinance short-term loans from the Government Development Bank to municipalities. As of March 2013, four municipalities owed $786 million in short-term debt to the GDB, including the City of San Juan.

"Of course, given recent market activity and rising yields, market access for any PR debt is questionable," Schankel said.

"A best-case scenario would be market stabilization with year-end tax selling behind plus stable fiscal and economic numbers for the second quarter of FY 2014."

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