Muni Market Update – Opportunities Among New Issues

By Tedra DeSue

(May 31st, 2012) Municipal bond investors have had little to complain about in terms of the amount of supply in the market over the past several weeks. Just last week they were able to pick up paper from a wide variety of issuers that flooded the market with roughly $9 billion of new money debt. The flow of municipal bonds into the market is expected to continue throughout the rest of the year, and so will the low interest rates. However, there are some steps that investors can take, especially retail investors, to find and capitalize on the myriad municipal deals being offered.

While investors may celebrate the increase in issuance, they are not celebrating the yields. On Wednesday, May 30, the benchmark U.S. Treasury yield fell to its lowest level in at least 60 years. Already low, interest rates were further dragged down over concerns about Spain’s banking system. Yields on 10-year notes sank to a record low of 1.62%, which was a sharp decline from the 1.73% for trading the day before. The 30-year Treasury bond yield fell to 2.71%, down from its 2.84% yield also posted the day before.

Among the large deals that were in the market last week were an $800 million general obligation bond offering from New York City and a $650 million electric and gas systems revenue refunding bond deal from San Antonio, Texas. The state of Washington sold $432 million of federal highway grant anticipation revenue bonds.

No need to fret if you missed out on the initial pricing of any of these. There is plenty where that came from. However, if you find any deals that have already priced in the primary market that strike your fancy, consider the secondary market. In many cases, this can be a good place to find bonds that offer higher yields.

Some estimates place the amount of municipal debt, including short-term and long-term, to be sold this year at $402 billion. The Securities Industry and Financial Markets Association (SIFMA) conducted a survey among several market participants, including Morgan Stanley, Wells Fargo Securities and Goldman Sachs to get an idea of how much debt would be issued this year compared to last year. These respondents projected long-term tax-exempt municipal issuance to total $303 billion in 2012, which would be a 20.2% increase from the $252 billion estimated for 2011. They projected long-term taxable municipal issuance to be $35 billion, which would be a 25% percent increase from the $28 billion estimate for 2011.  Excluding short-term notes, long -term issuance could reach $347 billion this year compared with $288 billion in 2011, according to SIFMA.

As of Wednesday, May 30, the site i-dealprospectus.com showed roughly $2 billion of deals pricing by June 6. This website can be an important tool as you review deals that are coming to market. It lists the dates deals price, their amounts, whether they are being sold competitively or through negotiation and the name of the financial advisor representing the issuer. There are also links to the preliminary and final official statements. Another useful site to review deals that have priced or that are coming to market is munios.com.

Another upcoming deal from New York City is for the New York City Transitional Finance Authority (TFA). It will sell $1 billion of fixed rate, future tax secured bonds on Wednesday, June 6. This includes $800 million of tax-exempt new money bonds that will be sold through negotiation with Goldman Sachs as the bookrunner. There will be a two-day retail order period beginning on Monday, June 4. Separately, the authority will issue $200 million through a competitive bid offering.

When looking into muni deals to invest in, try to find those that have retail order periods. This means that the underwriter has set aside a certain portion of the deal for just retail investors. This is by far the easiest way to get into some of the larger deals that you may find attractive. You can find a list of some of the retail order periods available to investors on Learn Bonds here, along with pricing information and other details.

Whereas institutional buyers tend to be attracted to deals with larger coupons, retail investors want more par bonds, noted Michelle Knight, chief economist and managing director of fixed income at Silver Bridge.

Keep in mind that the more complicated the deal, the more yield it will likely offer, noted Tom Dalpiaz, senior vice president of asset management for Advisors Asset Management. He suggested certain sectors like hospital, colleges and universities and airports, which can offer higher yields that general purpose projects.

“The can come cheaper. They are more complicated in terms of the different things that can affect their credit quality,” Dalpiaz said. “They have a specific revenue source, as opposed to [general obligation] bonds.” GOs are backed by the full faith and credit of the issuer.

Just like all that glitters is not gold, all deals that are huge are not the best. This is especially the case for retail investors.  Dalpiaz said investors should stick to deals that range in size from $20 million to $80 million.

“The really big deals may be scooped up, and the individual investor can be lost in the wash or overlooked,” Dalpiaz said.

One upcoming deal that may fit these criteria is from Pigeon Forge, Tenn., which is selling $25 million of GOs on June 5. These bonds will be sold competitively, so investors will be able to buy the bonds through their own banker once the winning bidder is confirmed.

Dalpiaz also advises that retail investors get a list of the states that have the highest income tax rates. These will include California, Connecticut and Virginia.

“As a general rule, avoid issues from high-tax bracket states,” Dalpiaz says. “They tend to have higher prices and lower yields.”

Regardless of which bond deal you decided to buy into, it is imperative that you do your due diligence before diving in, said David Twibell, president of Custom Portfolio Group.

“Ten years ago, you didn’t have to do a lot of due diligence,” Twibell said. “You could go out and have a reasonable sense about security backing the bonds and credit quality of the issuer.”
He noted that there are so many things to look for, such as the risk of default, that individuals may be served best by buying municipal bonds through a municipal bond fund so they can have a professional overseeing it.

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