June 7, 2013 / 8:56 PM / 6 years ago

U.S. muni bond sales seen up to $8 bln, market still wary

* Munis have underperformed global markets
    * Some deals postponed because of market uncertainty
    * Muni funds outflows widen

    By Hilary Russ
    NEW YORK, June 7 (Reuters) - U.S. municipal bond sales are
expected to rise slightly to $8 billion next week, after several
deals in the municipal bond market this week struggled to close,
were scaled back, or were postponed altogether - a shaky
foundation for next week's deals.
    Investor uncertainty over when the Federal Reserve will
begin slowing its massive bond buying program has been weighing
on the U.S. debt market since the start of May.
    Treasury bonds fell again on Friday, adding to losses for a
sixth straight week. And the $3.7 trillion municipal bond market
underperformed the broader market.
    The BofA Merrill Lynch US Municipal Security Index <
.MERU0A0> was down in the week 0.34 percent, while the broader
U.S. Corporate and Government Master Index < .MERB0A0> fell by
0.054 percent.
    The yield on top-rated 10-year GO muni bonds rose over 40
basis points in May, from 1.66 percent on May 1 to 2.09 percent
on May 31, according to Municipal Market Data, a unit of Thomson
    Muni bond prices also fell in secondary trading on Friday,
lifting yields by up to 6 basis points - to 12-month highs - and
further adding to a negative atmosphere.
    The 10-year yield on top-rated muni bonds rose 2 basis
points to end at 2.13 percent on Friday, while the 30-year yield
rose 6 basis points to 3.34 percent, according to MMD's triple-A
benchmark scale.    
   On the primary market, the most visible deal reduction this
week was a 40 percent cut in a $1.1 billion Massachusetts
general obligation bond sale, to about $670 million, because of
weakened investor demand.
    The issuer said it expects to come back to the market to
sell the remaining debt once conditions are more favorable.
    The triple-A rated city of Tempe, Arizona, also struggled to
close out a $41 million general obligation refunding sale,
particularly in the intermediate part of the curve between 2019
and 2021 maturities with 4 percent coupons, according to Greg
David, a municipal fixed-income trader at Wells Capital
    "This was a great quality bond ... It almost felt like
people were getting nervous. They really shouldn't have been,"
David said. "I think this was just general tone in our market."
    Tacoma, Washington and Portsmouth, Virginia also had to
cheapen deals slightly to clear them, he said.
    Not everyone is scared away. The current tax-free bond
market "is very attractive and offers opportunities for
portfolios not seen in a long time," wrote John Mousseau,
director of fixed income at Cumberland Advisors, in a note on
Friday. "It is the best opportunity in the municipal bond market
in the past twelve months."
    But investor interest as measured by municipal bond funds
was waning. Lipper data on Thursday showed that municipal bond
funds had net outflows of $1.472 billion in the week ended June
5 from net outflows of $156.86 million the week before.
    For next week, negotiated sales are expected to total nearly
$5.65 billion in 81 issues, compared with a revised $5.4 billion
in 84 deals this week.
    The biggest sale on next week's negotiated calendar is from
New Jersey's recently downgraded Rutgers University, which will
sell about $877 million of tax-exempt and taxable bonds. 
    Standard & Poor's Ratings Services on Tuesday cut its rating
for the state school to AA-minus from AA on increased
operational, financial, and credit risk related to its merger
with the University of Medicine & Dentistry of New Jersey.
    Moody's Investors Service also downgraded the university on
May 31, to Aa3 from Aa2, because of similar concerns.
    Rutgers is selling $339.3 million of tax-exempt GO refunding
bonds, $399.7 million of new GO bonds and nearly $138 million of
taxable GO refunding bonds. Morgan Stanley is the lead manager.
    The next biggest sale is an $800 million deal from New York
City Transitional Finance Authority. Loop Capital Markets is the
lead bookrunner for the new money deal. A two-day retail order
period begins Monday, with institutional pricing on Wednesday.
    Illinois is slated to sell $600 million of Build Illinois
sales tax revenue junior obligation bonds on Tuesday through
Barclays. S&P rated the bonds triple-A.
    Competitive sales are expected to total nearly $2.37 billion
in 170 issues next week. San Francisco, California, tops the
competitive calendar, with a planned sale of $232.6 million
general obligation bonds.
    The city of Houston, Texas, will sell $180 million of tax
revenue anticipation notes on Wednesday. Proceeds will help
finance general operating expenses in fiscal year 2014.
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