(The Bond Buyer) – The California municipal market was mostly flat with a slightly firmer tone Thursday, amid elevated secondary trading activity, as San Francisco Public Utilities Commission competitively sold $344.2 million of taxable Build America Bonds.

“The market still is very firm in spite of Treasuries going down,” a trader in Los Angeles said. “I think it has a lot to do with supply and demand. There is really very little supply in the marketplace. All the new issues seem to come to market priced through with the expectations of where its going to be. At higher prices they do tend to get cleaned up.”

The trader also noted that the secondary market “has been active today.”

“I have noticed that things were marked up from yesterday, and are actually trading today,” the trader said. “You get the picture that Treasuries really don’t govern the municipal market. I think what it’s really governed by right now is the supply and demand. And there’s not enough supply and there seems to be a little more demand than supply. It seems to be firm.”

In the California new-issue market the San Francisco Public Utilities Commission competitively sold $344.2 million of taxable BABs to Bank of America Merrill Lynch, with a true interest cost of 3.81%.

The BABs mature from 2022 through 2027, with a term bond in 2040. Yields range from 4.90% in 2022, or 3.19% after the 35% federal subsidy, to 6.00% in 2030, or 3.90% after the subsidy, all priced at par. The bonds were priced to yield between 195 and 275 basis points over the comparable Treasury yield.

The San Francisco PUC also competitively sold $102.7 million of tax-exempt bonds to JPMorgan, with a TIC of 2.53%.

The bonds mature from 2015 through 2021, with yields ranging from 1.51% with a 5% coupon in 2015 to 3.00% with a 3% coupon in 2021. Bonds maturing in 2016 were not formally re-offered. The bonds are callable at par in 2020.

The credit is rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s.

The Treasury market showed losses Thursday. The benchmark 10-year note was quoted recently at 2.94% after opening at 2.87%. The 30-year bond was recently quoted at 3.95% after opening at 3.93%. The two-year note was recently quoted at 0.57% after opening at 0.56%.

The Municipal Market Data triple-A scale yielded 2.57% in 10 years and 3.67% in 20 years Thursday, matching levels of 2.57% and 3.67% Wednesday. The scale yielded 3.97% in 30 years Thursday, matching 3.97% Wednesday.

Thursday’s triple-A muni scale in 10 years was at 88.0% of comparable Treasuries and 30-year munis were at 100.8%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 107.3% of the comparable London Interbank Offered Rate.

The yield environment also contributed to the Rector and Visitors of the University of Virginia’s $190 million competitive offering Wednesday crossing the 5% threshold, yielding 4.90% before accounting for the 35% federal subsidy. It yielded 3.19% after accounting for it.

“You are talking about a specialty state area, and this exemplifies those characteristics given that the fact you do have a scarcity of paper in Virginia,” said Howard Mackey, president of the broker-dealer division of Rice Financial Products. “From a BAB situation you might have a local appeal, with a high quality name in this market place. Virginia paper was still quiet attractive.”

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(Bloomberg) – San Francisco’s Public Utilities Commission, which supplies water to 2.5 million people in the Bay Area, is selling about $387 million in Build America Bonds as issuance of the taxable debt falls to a two-month low.

The securities are set to trail tax-exempt muni bonds for the first month since February. Build Americas have lost 0.68 percent in July, compared with a 0.85 percent gain for tax- exempts, according to Bank of America Merrill Lynch data. The underperformance comes as legislation to extend the Build America program beyond this year has stalled in Congress.

“It’s a combination of it being the middle of the summer, people are more worried about state budget concerns and people are worried that the program won’t be continued,” said Philip Fang, who manages an exchange-traded fund investing mainly in Build Americas at New York-based Invesco Powershares Capital LLC.

About $827 million in Build Americas, whose interest costs are federally subsidized, are scheduled for sale this week. That’s the lowest amount for a non-holiday period since the week ended April 30, according to data compiled by Bloomberg. Issuers are slated to sell $4.4 billion in tax-exempt debt.

States have projected combined budget deficits of $127 billion from the last month of fiscal 2010 through 2012, according to a report last month by the National Governors Association and the National Association of State Budget Officers.

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(Bloomberg) – Los Angeles Community College District, the largest two-year system in the U.S., plans to sell $900 million in Build America Bonds as the yield premium that investors demand on the debt rose to a record.

The taxable offering include maturities of 32 and 39 years that may be priced to yield 255 and 270 basis points respectively above the benchmark 30-year Treasury, according to a person with direct knowledge of the sale. A basis point is 0.01 percentage point.

The so-called spread rose to 207 basis points on average yesterday from about 150 three months ago, according to a Wells Fargo index that began last August. The reading comes as Treasury yields have fallen about 50 basis points since May 3 amid signs of a slowing economy.

“Of all the ‘L.A.’ names, the community college district is the best name right now,” said Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., which specializes in the state’s securities. “It’s really well regarded and trades well, but it’s getting tainted by the fact it has ‘L.A.’ in it.”

The City of Los Angeles had its debt rating cut one level to Aa3, fourth-highest, by Moody’s Investors Service and one step lower, to A+, by Fitch Ratings in April on difficulties in balancing the budget of the nation’s second-largest city by population.

The district, with 141,000 enrolled students on nine campuses, plans to use today’s federally subsidized issue for construction and renovation, including a so-called green- technology student union at Los Angeles City College and a performing-arts center at Los Angeles Valley College.

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(Bloomberg) — The Bay Area Toll Authority, which is financing the new San Francisco-Oakland Bay Bridge, sold $1.5 billion of Build America Bonds in the largest issue since the Municipal Electric Authority of Georgia sold $2.2 billion in March to pay for nuclear plants.

The offering, rated fifth-highest by Moody’s Investors Service and Standard & Poor’s at A1 and A+, respectively, was scaled back from the scheduled $1.75 billion after a callable option — giving the issuer the right to redeem before the due date — was dropped, said Brian Mayhew, the chief financial officer of the authority. Yields were raised to appease concern about outstanding debt, according to an investor.

“The authority has a lot of bonds outstanding already,” said Bud Byrnes, chief executive officer of Encino, California- based RH Investment Corp., which specializes in the state’s debt. “The underwriter made a good-faith attempt to bring it at lower levels and the market wanted more,” he said, referring to the final yield offered. “Investors got a good price but the authority also did well.”

The $250 million of securities maturing in 2030 priced to yield 6.79 percent, 275 basis points above the 30-year Treasury used as the deal’s benchmark. The $400 million portion due in 2040 was 287.5 basis points more than the benchmark, and the $850 million maturing in 2050 yielded 7.04 percent, 300 basis points above. A basis point is 0.01 percentage point. Bank of America Merrill Lynch managed the group handling the sale.

The $250 million portion was forecast to price 250 basis points above the benchmark, according to Informa Global Markets, a London-based financial analysis company. The 2040 tranche was initially set at $500 million and expected to price 275 basis points above while the 2050 maturity originally stood at $1 billion with a predicted 287.5 basis-point premium.

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(Bloomberg) – Los Angeles Community College District, whose 137,000 students make it the nation’s largest two-year system, plans to market a $1.2 billion offering, its biggest on record, as soon as this month.

Last week’s $9.1 billion in issuance, the highest in three weeks, outstripped investor demand and forced underwriters to raise yields, Janney Montgomery Scott LLC analysts led by Alan Schankel said in a report June 11. Scheduled sales this week are down 14 percent to $7.8 billion, according to data compiled by Bloomberg.

A combination of fewer issues and the second-highest credit ratings from Moody’s Investors Service may help the district hold down borrowing costs, said William O’Connor, president of O’Connor & Co. Securities Inc., a municipal underwriter based in Newport Beach, California. The district is rated Aa1 by Moody’s.

“To have a name with that rating coming to this market should be very attractive to buyers,” said O’Connor, who’s not part of the underwriting group. “Anything with a double-double rating on its own commands a premium.”

The Los Angeles district, made up of nine campuses in the nation’s second most-populous city, intends to sell tax-exempt capital appreciation bonds and taxable Build America Bonds. Most of the proceeds will pay for construction and renovation, preliminary offering documents show. The tax-exempts will be sold during the last week of June, with the Build Americas set for the third week of July, according to Alex Samuelson, a spokesman for New York-based Citigroup Inc., which is marketing the deals. Pricing dates will be subject to market conditions.

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(Bloomberg) – San Francisco’s Public Utilities Commission, the third-largest municipal utility in California, offered more than $417 million in Build America Bonds, with the yield premium over Treasuries close to the widest in six months.

Investors in taxable, 30-year Build Americas demanded an of 165 basis points, or 1.65 percentage points, of extra yield on average relative to comparable-maturity Treasuries yesterday, according to data compiled by Bloomberg. The so-called spread has widened 19 basis points since May 3.

San Francisco pumps water more than 180 miles (290 kilometers) from Yosemite National Park to supply 2.4 million customers in the Bay Area. The bonds, backed by water-system revenue, are rated Aa2 by Moody’s Investors Service and AA- by Standard & Poor’s, third- and fourth-highest. The utility paid investors 189 basis points more than 30-year Treasuries for debt maturing in 2040.

The spread has grown because “we read every day about issues within municipalities that raises concern for investors, especially those who haven’t been in the muni market traditionally, like a lot of Build America investors,” said Ashton Goodfield, who helps oversee $29 billion at Deutsche Asset Management in Boston. “There’s also added supply this week, and over the past month, we’ve had a rally in Treasuries; you can’t point to one factor.”

Municipalities including New York, Cleveland and Austin, Texas, are scheduled to sell $2.7 billion in Build Americas this week, bringing total issuance to more than $110 billion, according to Bloomberg data. Issuers are eligible for a 35 percent subsidy of their interest costs from the U.S. Treasury.

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(Bloomberg) – The Los Angeles Department of Water & Power, the largest municipal utility in the U.S., sold $667.9 million in debt as yields for bonds backed by water and electric bills fell to the lowest in two months.

Ten-year debt supported by utility payments reached 3.33 percent yesterday, the lowest since March 29, according to Bloomberg Fair Market Value data. The premium over general obligations that investors are demanding for 10-year municipal revenue bonds, backed by utilities, has fallen 78 basis points in the past 11 months as states and municipalities work to close budget deficits. A basis point is 0.01 percentage point.

“I don’t think they are too expensive right now,” Gary Gildersleeve, a partner at Evercore Wealth Management in New York, said before the sale. “The psychology from a few years ago was ingrained that GOs were always better because they could tax. It’s now revenue bonds — if you can find issues that have a dependable revenue stream then why take on the headline risk?”

Rate Rise

The department sold $51.9 million in tax-exempts yesterday, less than the planned $64 million cited in the preliminary documents. The bonds mature serially from 2011 through 2022, with double maturities in 2020 and 2021. The 5 percent notes maturing in 2022, the largest portion of the offering, priced to yield 3.52 percent. That’s 34 basis points lower than the average AA- rated tax-exempts, which yielded 3.86 percent yesterday, according to Bloomberg Fair Market Value data.

The $616 million in Build America’s mature in 2039 and 2040. The bond maturing in 2040 priced to yield 6.17 percent, 34 basis points higher than the average Build America Bond yield of 5.83 percent, according to the Wells Fargo Build America Bond Index.

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(Bloomberg) – California and Massachusetts increased the size of bond sales, taking advantage of falling yields and increased demand for municipal debt.

California yesterday sold $2.97 billion of revenue bonds to refinance debt from the state’s power crisis of 2001-2002, after increasing the size of the offering by 49 percent. Massachusetts decided to add $50 million to its $400 million sale of federally subsidized, taxable Build America Bonds.

Ten-year, tax-exempt municipal yields have declined to their lowest level in more than a month as similar maturity U.S. Treasury yields tumbled from the 4.01 percent they touched on April 5, an 18-month high, as concern Greece would default on its debt spurred investors to buy U.S. government securities. States and municipalities were set to sell $9.2 billion of tax- exempts this week, the most since January, according to data compiled by Bloomberg, with California’s offering the largest such deal this calendar year.

“Stocks are down, there’s a lack of supply and pent-up demand,” said William O’Connor, president of O’Connor & Co. Securities Inc., an Orange County, California-based municipal underwriter. California is “taking the surplus demand and selling all the bonds they can.”

The state has benefited from recalibration, after Moody’s Investors Service raised its rating to A1, the fifth-highest, from the third-lowest investment grade, Baa1. The penalty California pays to borrow has fallen, with 10-year yields over top-rated debt narrowing to 1.12 percentage points from as much as 1.5 percentage points in March, according to indexes compiled by Bloomberg.

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(Bloomberg) – The agency financing construction of the new San Francisco-Oakland Bay Bridge may sell as much as $4 billion of bonds this year to take advantage of federal debt subsidies before they’re scaled back or expire.

The Bay Area Toll Authority, the Oakland-based agency that finances bridge construction using tolls from seven state-owned spans around San Francisco, approved issuing a combination of tax-exempt securities and taxable Build America Bonds today.

Build America issues have eased borrowing costs on $98 billion in state and local government debt in the past year, becoming the fastest-growing part of the $2.8 trillion municipal market, according to data compiled by Bloomberg. The U.S. Treasury pays issuers 35 percent of the interest through the program, which was created under the economic stimulus plan and is set to expire at the end of this year.

“There’s a lot of money at stake,” said Brian Mayhew, the chief financial officer of the authority. “We will try to be opportune on both” taxable and non-taxable issues.

Congress is moving to keep the program in place while cutting back the amount local governments receive. Last month, the U.S. House of Representatives approved extending the program until 2013 while lowering the Treasury’s share of the interest bill, in phases, to 30 percent.

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(Reuters) – Six top underwriters of California debt have since 2007 completed over $27.5 billion of credit default swap trades on the state’s general obligation bonds, the California Treasurer’s office said on Thursday.

The disclosure marked the latest step in Treasurer Bill Lockyer’s inquiry into whether it is appropriate for the six banks that underwrite the state’s debt to also sell credit default swaps on it.

Lockyer is concerned the twin functions puts the banks in a position whereby they may bet against the state’s low credit rating and inflate the cost for California to issue debt.

The finding results from a letter sent last month by Lockyer to Bank of America Merrill Lynch (BAC.N), Barclays (BARC.L), Citigroup (C.N), Goldman Sachs (GS.N), JP Morgan (JPM.N) and Morgan Stanley (MS.N) expressing concern spreads on California CDS are mispricing the state’s credit risk and inflating interest costs.

Lockyer says the state’s low credit rating a poor gauge of California’s credit-worthiness since it has never defaulted on a debt service payment and is very unlikely to do so despite the state’s budget problems.

California paid the six banks a combined $215 million bond underwriting fees and commission, a statement by Lockyer’s office said.

CDS are used to hedge against default risk or to speculate on credit quality. The contracts were widely blamed for adding to fears about financial firms such as Lehman Brothers before it failed in 2008.

Lockyer’s office in its statement said the treasurer believes the CDS trading’s effect on bond prices is “not significant enough to cause concern at this time.” The statement underscored “at this time.”

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