The municipal market was unchanged to slightly weaker yesterday, lagging behind an afternoon Treasury rally that followed an early-morning sell-off in the Treasury market.
With Treasuries down in the morning, tax-exempt yields were higher by three to five basis points. However, while Treasuries finished the session improved, munis drifted only back to flat to one basis point weaker.
"It's definitely better than it was in the morning, but we're still down," a trader in Chicago said. "There's still not much trading going on either way, though, as everybody is kind of waiting it out. If you had something you had to do or had to get out of, you probably lost a bit of money."
"I'm not seeing that much movement. I guess it made the Treasuries sell off early in the morning, and people were hitting bid sides a little bit then, but it seemed to come back," a trader in Los Angeles said. "Now, they're even up for the day, I don't know how. I would say munis are flat overall to maybe a basis point weaker. There's so little going on."
The Treasury market showed losses yesterday morning on news that, after much speculation, the U.S. government Sunday took control of troubled mortgage giants Fannie Mae and Freddie Mac, placing them under conservatorship by their federal regulator, the Federal Housing Finance Agency.
However, Treasuries did an about-face in the afternoon that was perplexing to some market participants. The yield on the benchmark 10-year Treasury note, which opened at 3.70%, finished at 3.65%. The yield on the two-year note was quoted near the end of the session at 2.29% after opening at 2.30%. The yield on the 30-year Treasury was quoted near the end of the session at 4.26% after opening at 4.30%.
"I would have never in a million years thought that's what would have happened [yesterday]. It's shocking," said Bill Hornbarger, fixed-income strategist at Wachovia Securitiesin St. Louis. "The only thing that I can think is you've got a rally in the dollar, you've renewed confidence in the [government sponsored enterprises] from foreign investors, which is spilling over into the Treasury market. I think what this is saying is it makes [Treasuries] more attractive to foreign investment."
"It doesn't make any sense at all. I just think it's this idea that our market has again become very attractive to foreign investors," Hornbarger added. "That's the only rational explanation I can come up with. I would have thought that Treasuries would have been down. More issuance, big rally in stocks, credit spreads are wider, reversal of the flight bid, all that argues that bonds should be down" yesterday.
A trader in New York said that, while the Fannie and Freddie news didn't strongly impact the muni market yesterday, it could have a long-term affect.
"I guess it could eat into the demand side a little if retail focuses more on GSEs, because they're one step removed from Treasuries as opposed to being some sort of implicitly guaranteed kind of thing," the trader said. "Now it's a little more explicit, so maybe they'll catch some retail demand, and that would take business away from tax-exempts, if individual investors start focusing on GSEs. But I don't know if that's going to happen or not, but it certainly occurs to me that it could."
However, a trader in Los Angeles doesn't think the news will have much of an impact on tax-exempts.
"There are a bunch of pre-refunded bonds that are escrowed in Fannie and Freddie, but it seems like if anything, those should be doing better, given that now a lot of people feel like they're backed by the government," the Los Angeles trader said. "Overall though, in terms of bond issuance and everything like that, I don't think it has much of an impact."
In the new-issue market yesterday, JPMorgan priced for retail investors $460.8 million of revenue bonds for the Dormitory Authority of the State of New York. The bonds mature from 2011 through 2026, with yields ranging from 2.50% in 2011 to 4.70% in 2026, all priced at par. The bonds, which are callable at 101 in 2017, declining to par in 2018, are rated AA-minus by Standard & Poor's and A-plus by Fitch Ratings. Institutional pricing is scheduled for today.
Citi priced $181.1 million of highway revenue bonds for the Arizona Transportation Board. The bonds mature from 2023 through 2033, with yields ranging from 4.20% with a 4.125% coupon in 2023 to 4.64% with a 5% coupon in 2033. The bonds, which are callable at par in 2018, are rated Aa1 by Moody's Investors Service and AAA by Standard & Poor's.
Wisconsin's Madison Metropolitan School District competitively sold $64 million of tax and revenue anticipation promissory notes to Morgan Stanley with a net interest cost of 1.71%. The Trans mature in September 2009, yielding 1.69% with a 3% coupon. The credit is rated MIG-1 by Moody's.
Finally, the Independent School District No. 624, in White Bear Lake, Minn., competitively sold $40.1 million of general obligation taxable bonds to Morgan Keegan & Co. with a true interest cost of 5.09%. The bonds mature from 2011 through 2021. None of the bonds were formally re-offered. The bonds, which are not callable, are rated AAA by Standard & Poor's.
