Denver airport bonds nosed upward yesterday despite a downgrade, while tax-exempts overall ended a moderately active session unchanged.
Word that officials had again postponed the opening of Denver International Airport led some market players to muse that the acronym DIA stands for "Delayed It Again."
"Nothing's happened since the downgrade," Stephen Wolfe, portfolio manager of the T. Rowe Price Tax-Free High Yield Fund, said yesterday a few hours after Moody's Investors Service announced its ratings cut.
If anything, airport bonds have posted slight gains though trading was limited, Wolfe said. "I think the downgrade was pretty much anti-climactic," he said.
Moody's Investors Service cut its rating on Denver Airport revenue bonds to a conditional Baa from conditional Baa1, citing concerns about the airport's delayed opening and its management.
"This latest delay brings into focus management's recent inability to set and achieve realistic goals and to develop a feasible strategy for opening the airport," Moody's said in a press release. "While the difficulties of bringing the technologically complex baggage system on-line is understandable, a managerial problem is also evident."
The latest delay is the fourth so far. In addition to this month, plans had also been made for October, December and March openings.
While Wolfe said he sees the project a "pretty viable" long-term.
"I think the entire project is at a very critical threshold," he said. Short term, the outlook continues to be "very rocky," he noted. "They simply have got to get this baggage system under control."
Since early February, Denver International Airport issues have gone from trading at about 60 basis points above insured paper with similar coupons to about 120 basis points above.
Following the hits taken last Thursday and Friday, the bonds have improved, Wolfe said, adding that he's seen healthy buying interest for bonds trading in the 7.60% to 7.70% range.
Earlier yesterday, Wolfe said he saw a small amount of 6 3/4% bonds trade at 7.50%, which he found encouraging. Denver Air bonds make up slightly more than 1% of his $875 million portfolio, he said.
"They are trading up slightly today," agreed Cynthia Clemson, a vice president and portfolio manager of Eaton Vance Colorado Tax Free Fund. Like Wolfe, Clemson thinks the credit is a viable one long term.
"It's got good strong credit fundamentals," she said. The bonds, however, could see some more downside, particularly if they go below investment grade as Standard & Poor's has hinted, Clemson said.
"Really, what they have to do is get their management up to speed," she said. Denver airport bonds represent about 3% of the fund, the size of which Clemson declined to disclose.
Kurt Larson, portfolio manager of the IDS High Yield Tax-Exempt Fund, said Denver Airport bonds had been coming back a bit Tuesday and yesterday. He noted that the downgrade came from just one rating agency and was fairly mild.
"And I think perhaps, yes, they did get oversold," he said.
While, like Wolfe and Clemson, Larson thinks the project is viable long-term, the bonds could face more declines in the days ahead.
"I think there's going to be some uncertainty in here until they get the airport opened up," he said. Denver Airport bonds make up roughly 1% of the fund's $6.5 billion assets, he said.
Secondary Market
As for municipals overall, both high-grade and dollar bonds ended unchanged.
The market opened flat, but gained 1/8 point by mid-morning. Then it dropped 1/4 point to be down 1/8 by roughly by early afternoon. Later, however, municipals came back to finish unchanged for the day.
In debt futures, the June municipal contract closed up 1/4 point to 91 1/32s. Yesterday's June MOB spread was negative 425, down from minus 430 on Tuesday.
In the Treasury market, a late-day short covering rally pushed the 30-year bond higher and the long bond ended up 1/8 point to yield 7.33%.
The benchmark bond had been down as much as 1/2 point earlier in the day in part on fears the Federal Reserve would hasten a rate hike to cure the sick dollar and retard inflation.
Many in the market said they believe that the Federal Reserve will not tighten monetary policy before its May 17 Federal Open Market Committee meeting. "I suspect it's probably a little bit better than a 50% chance that they go sooner," said Kendrick D. Anderson, a group vice president and head of municipal research at Duff & Phelps.
The analyst said the Fed will continue to "stair-step" short-term rates higher in 1/4 percentage point increments until long rates begin going down or the economy starts to weaken.
Anderson doesn't expect the long-end to rally soon, and he said any economic weakness is unlikely to show up until September.
"The reason is that right now it takes about six months for Fed policy to have an effect," Anderson said. "It will take at least six months for the Fed's recent tightening program to have an effect on the economy and several months after that for the effect to show up in the numbers."
As for municipal bonds, Anderson sees them starting to outperform Treasuries. He said that while funds still appeared to be seeing outflows, investment from individual retail has picked up.
"A lot of people paid those April 15 taxes and decided munis are the place to be," Anderson said.
Elsewhere, Standard and Poor's Corp.'s The Blue List totaled $1.802 billion yesterday, up $56 million from $1.746 billion on Tuesday.
The 30-day visible supply totals $4.26 billion today, down $148 million from $4.408 billion yesterday.
