Volatility and speculation about defaults and bankruptcies in the municipal market continue to spook issuers and investors, affecting volume in the primary market.
Only $2.7 billion is expected to be priced this week, according to Ipreo LLC and The Bond Buyer.
The estimate is around one-quarter of the average weekly volume. It is only slightly more than Thomson Reuters’ revised $2.16 billion that priced last week while municipals struggled to rebound from a sell-off that hurt the tax-exempt market in the week ended Jan. 14.
Howard Mackey, president of the broker-dealer division of Rice Financial Products in New York, said the talk of municipal defaults that sent the market into a tailspin last week is highly exaggerated and that the primary market has fallen victim to headline risk. The end of the taxable Build America Bonds program is compounding the supply shortage while leaving fewer options for issuers with crucial financing needs.
“The suggestions about major defaults [in the municipal market] are really overdone,” Mackey said. He added that analysts who make blanket statements about certain states “have not done their homework” and are hindering volume and misleading investors.
“Their degree of risk is all over the place,” he said of the analysts’ predictions. “They are implying that all the states are painted by the same brush, and I think that has some impact on the light calendar. Major issuers are taking a look and making some decisions about their timing in the market.”
While institutional investors are still active, some of the retail crowd is “starting to pull in their horns,” Mackey said.
“We have heard that private client management groups have had redemptions by small investors, so the news items are having a detrimental effect among some investors,” he said.
Recent news reports that policy makers in Washington may consider allowing states to file for bankruptcy to cope with troubled pension systems and other financial problems were having minimal immediate effect, but sources said that could eventually compound investors’ fears.
Last week’s light calendar arrived amid some firmness in the secondary market, while the new-issue market rallied.
The generic triple-A general obligation bond in 2041 ended at a 4.90% yield at the close of trading Friday, down from 5.02% earlier in the week, according to Municipal Market Data.
“We didn’t see a lot of trades going on and there are still a lot of bid-wanted lists in the Street,” Mackey said. “Major institutions have had lists out fairly consistently, and we continue to see outflows among bond funds, so that all suggests that the market is still very skittish at this point.”
A Bloomberg LP index tracking bids-wanted for municipal bonds hit a record $1.4 billion last month. It was at $1.33 billion last Wednesday.
The market has some hurdles going forward this week, according to Mackey.
He pointed to the largest deal, a $575 million hospital revenue offering on behalf of Sutter Health to be priced by Morgan Stanley.
In the current backdrop of uncertainty, Mackey said the deal will be scrutinized much more by major institutional investors than Morgan’s other deal pricing this week — $300 million from the Dormitory Authority of the State of New York for triple-A-rated Columbia University.
He said they also would be less apprehensive about a $300 million Port Authority of New York and New Jersey competitive revenue sale Thursday that matures from 2030 to 2041. It is rated Aa3 by Moody’s and AA-minus by the two other major rating agencies.
“High-grades are always in demand and are a step above the fray in terms of credit issues, so they are not really going to be affected by that cloud going on in the muni market,” Mackey said. “The Port Authority is a good name, and it’s double-exempt in New York and New Jersey, and that is going to create a nice pocket of demand.”
Of the Sutter Health deal, Mackey said: “It’s California and its hospital-related, so it represents a little more of a challenge and that probably will have some impact on price. That challenge is nothing new, but in this environment, major buyers will take a hard and rigorous look at the credit.”
An underwriting source at Morgan Stanley could not confirm the exact sale dates or structures on either offering at press time.
The California financing will come in two parts — Series 2011 A issued by the California Statewide Communities Development Authority and Series 2011 B issued by the California Health Facilities Financing Authority.
Both are expected to be rated Aa3 by Moody’s Investors Service and AA-minus by both Standard & Poor’s and Fitch Ratings.
Reflecting on last week, Mackey said some deals, like the $450 million New York City Municipal Water Authority revenue offering priced by Jefferies & Co., were able to lower yields.
While the deal did well overall, he said, retail investors bought only $37 million of the $50 million 2040 maturity, which carried a 5.375% coupon and was repriced three basis points lower in yield to 5.47% last Wednesday from the original retail scale offered on Tuesday.
“For New York City paper, that’s a light showing of retail interest, so it tells you that retail is basically pulling back,” Mackey said.
The expiration of the BAB program is also contributing to the dearth of supply.
“It puts a lot of pressure on tax-exempt bonds because municipalities don’t have another avenue to raise funds,” Mackey said. “It’s unfortunate that Congress saw fit to eliminate a market that grew to international proportions and had very good liquidity.”
The overall relative value offered by municipals should help boost demand as it did last week when crossover buyers participated in New York City’s water financing, Mackey noted.
“When you are getting rates above 100% of Treasuries, that has to be attractive,” he said.
The 30-day visible supply stands at $7.7 billion, but large deals, such as the $1.3 billion New York Liberty Development Corp. revenue sale, remain on the day-to-day calendar.
That offering is expected to price within the next three months.