The municipal market was unchanged to slightly firmer yesterday in light trading, underperforming Treasuries.
"Today, we've recouped whatever we may have lost on Friday," a trader in Chicago said. "We're definitely feeling better now, but you can't get too excited yet."
The Treasury market showed gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 4.09%, finished at 4.01%. The yield on the two-year note finished at 2.58% after opening at 2.71%. The yield on the 30-year Treasury was quoted recently at 4.62% after opening at 4.69%.
Yields rose last week, especially in the tax-exempt money market, on news that Moody's Investors Service had put Financial Security Assurance Inc. and Assured Guaranty Corp. on review for possible downgrades, George Friedlander, managing director and fixed-income strategist at Citi, wrotein his weekly comment. Although Moody's said it would not drop either below Aa2, investors appeared somewhat fearful, given the downgrades to other bond insurers, Friedlander said. Evidencing these concerns, the SIFMA seven-day swap index rose to 2.35% July 23 from 1.49% July 16.
"There is very little paper with which the funds are fully comfortable, and they are building in a risk premium," Friedlander wrote.
He said the market will still demand bond insurance in the long term, even if it's not clear which companies will survive to sell it. Assured and FSA both have existing underwriting infrastructure, though, which give them an advantage over any new entrants.
"The market is in flux, and the final mix of the insurers who will survive and flourish is not entirely clear," Friedlander wrote. "Despite this concern, we believe that FSA and Assured-backed long-term bonds with solid underlying ratings are attractively priced right now."
For the overall market, "yields appear to be at or close to the level at which strong retail demand reduces the risk that yields will move sharply higher, unless Treasury yields jump to an unlikely degree," Friedlander wrote. Along with other factors, it makes Citi "believe that munis have once again entered a buying range, all along the yield curve."
Matt Fabian, managing director of Municipal Market Advisors, wrote in his weekly comment that "last week's losses have created value for purchasers this week."
"Not only has the bubble-like pricing of high-grade securities deflated with the insurers' troubles, but also nominal yields are approaching a demand cliff behind 5%, MMA's 10-year value indicator is now firmly in the 'buy' category and most maturities beyond five years appear to be offered with small to moderate price concessions," he wrote. "These points should help dull weakness related to the insurers and what has become a reliable trend in month-end selling, but yields should still be biased higher."
In today's new issues, King County, Wash., competitively sold $350 million of sewer revenue bonds to Citi at a true interest cost of 5.32%. Bonds mature 2017 through 2033, with term bonds in 2038, 2040, 2043, 2048. None were reoffered. The bonds, which are callable at par in 2018, are rated Aa3 by Moody's and AA-plus by Standard & Poor's.
The Milwaukee Metropolitan Sewerage District competitively sold $70 million in general obligation sewer system bonds to BMO Capital Markets at a true interest cost of 4.4465%. The bonds mature 2009 through 2028, with yields ranging from 2.30% on a 3.25% coupon in 2010 to 4.8% on a 5% coupon in 2028. Bonds maturing 2011 through 2015 and 2017 through 2025 were not reoffered. The bonds, which are callable at par in 2018, are rated Aa1 by Moody's, AA-plus by Standard & Poor's, and AAA by Fitch Ratings.
In addition, Morgan Stanley tentatively priced $60.4 million of subordinate-lien police and fire pension payment bonds for Cleveland. The bonds mature from 2009 through 2018, with a term bond in 2024. Yields range from 1.67% with a 5% coupon in 2009 to 4.78% with a 5.25% coupon in 2024. The bonds, which are callable at par in 2018, are rated AA by Standard & Poor's.
RBC Capital Markets priced $54.7 million in unlimited-tax school building bonds for Livingston Independent School District, Texas Bonds mature in 2009, 2014 through 2028, 2033, and 2038. Yields range from 1.70% with a 3.50% coupon in 2009 to 5.10% with a 5% coupon in 2038. The bonds, which are callable at par in 2018, are backed by the state's triple-A Permanent School Fund with an underlying rating of A from Standard & Poor's.
The Board of Regents of the Texas A&M University System competitively sold $52 million in Permanent University Fund flexible rate notes to Citi at a true interest cost of 2.9073%. The taxable bonds mature in September, with a yield of 2.95% on a 3% coupon. The bonds are rated Aaa by Moody's and AAA by Standard & Poor's.
RBC Capital Markets priced $47.6 million in unlimited-tax school building bonds for the Seguin Independent School District of Texas. The bonds mature from 2019 through 2028, with term bonds in 2031 and 2035. Yields range from 4.19% with a 5% coupon in 2019 to 5.05% with a 5% coupon in 2035. The bonds, which are callable at par in 2018, are backed by the PSF and have underlying ratings of A2 from Moody's and A-plus from Standard & Poor's.
A slate of economic data will be released this week, beginning with the July consumer confidence index today and the remaining bulk of activity coming at the end of the week. On Thursday, second-quarter gross domestic product data will be released, along with the second quarter core PCE price index, initial jobless claims for the week of July 26, continuing jobless claims for the week of July 19, and the Chicago purchasing managers index. On Friday, July non-farm payroll data highlights the day, on which July unemployment data, average hourly earnings, June construction spending and the July Institute for Supply Management business activity composite index will also be released.
Economists polled by IFR Markets are predicting a 72,000 decline in non-farm payrolls. They are also forecasting a 50.0 reading for the consumer confidence index, a 2.4% annual rate for GDP, 398,000 initial jobless claims, 3.150 million continuing jobless claims, a 49.0 Chicago PMI reading, a 0.4% dip in construction spending, a 49.2 reading in the ISM index, and an unemployment rate of 5.6%.
