The municipal market was markedly weaker yesterday as market participants continued to deal with the turmoil that has endured throughout the week.
Traders said tax-exempt yields were at least 10 to 12 basis points weaker overall, but it is significantly weaker than that in some spots and difficult to pinpoint.
"It's significantly cheaper; we're very dislocated," a trader in Chicago said. "It's not for the faint at heart. There's a ton of good value out there, but as they say, the markets can stay irrational longer than some guys can stay solvent."
"The market is down again, but it's hard to say how much," a trader in New Jersey said.
The turbulence in the market this week is caused by the fallout from Lehman Brothers Inc.'s bankruptcy and subsequent agreement to sell substantially all of its North American businesses and operating assets to Barclays Capital, Bank of America's planned purchase of Merrill Lynch & Co., and the news that the Federal Reserve has decided on an $85 billion bailout of American International Group Inc. The unprecedented developments are having a dramatic impact on the municipal and Treasury markets. Muni yields have steadily declined this week, while Treasury yields have seen tremendous flight-to-quality gains prior to weakening a bit yesterday.
Yesterday, the Federal Reserve announced that it would inject $55 billion into the banking system to try to alleviate the ongoing credit crunch.
Scheduled transactions in the primary market continue to be postponed, following a deluge of postponements and deal size reductions Wednesday. South Carolina's Fort Mill School District 4 postponed until further notice a $26.4 million general obligation bond sale, which had been scheduled to competitively sell yesterday. And both New Haven, Conn., and Council Rock School District, Pa., also postponed deals, worth $39 million and $10 million, respectively.
However, the Kansas Development Finance Authority, for one, was able to come to market with a $64.3 million competitive sale. The bonds were sold to Edward Jones with a true interest cost of 4.93%. The bonds mature from 2009 through 2020, with term bonds in 2023, 2025, and 2028. Yields range from 2.00% priced at par in 2009 to 4.50% priced at par in 2020. Bonds maturing in 2023, 2025, and 2028 were not formally re-offered. The bonds, which are callable at par in 2018, are insured by Financial Security Assurance Inc.
Additionally, the State and Local Government Series securities program, which is used by tax-exempt bond issuers who need to invest bond proceeds, has seen a tremendous decline in the time deposit rates of its one-month securities. The rate, which was at 1.50% on Sept. 12, yesterday fell to 0.06%.
The Treasury market showed losses yesterday, after posting tremendous flight-to-quality gains all throughout this week, especially on the short end, prior to yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.41%, finished at 3.53%. The yield on the two-year note was quoted near the end of the session at 1.78% after opening at 1.64%. The yield on the 30-year Treasury finished at 4.16% after opening at 4.08%.
Municipals have cheapened significantly compared to Treasuries amid the flight-to-quality. The ratio between triple-A rated, 30-year GOs and 30-year Treasuries reached 121.38% Wednesday, its highest point ever, according to Municipal Market Data.
"It's really an absolute panic to buy Treasury bills for the most part," said Tom di Galoma, head of U.S. government bond trading at investment bank Jefferies & Co. "I think that all markets sort of overreact, and I think we're certainly having an overreaction at this point. Probably in the next two or three days, more level heads will prevail in here. I get the feeling that there was probably a lot of pent up demand for Treasuries, and there hasn't been enough around."
"The Fed has been selling bills," he continued. "They've sold a couple different issues [yesterday], they sold some [Wednesday], and they're probably going to continue to sell issues pretty much every day to try to force the Treasury market to once again have some liquidity. I think right now you have a situation where the demand is just higher than the supply."
"And also you've had some of these money market funds break the $1 mark, and I think that is having an adverse effect where some are concerned that they shouldn't be investing with certain counterparties, that they should just stay in U.S. government-guaranteed debt, and that's where they're trying to get to. But there's obviously a much bigger problem," di Galoma added. "We've had an enormous credit crunch in the financial system and this is just one outcome from a more systemic problem that's happening."
In economic data released yesterday, initial jobless claims for the week ended Sept. 13 came in at 455,000, after 445,000 the previous week. Economists polled by IFR Markets had predicted 440,000 initial jobless claims.
Continuing jobless claims for the week ended Sept. 6 came in at 3.478 million, after a revised 3.533 million the prior week. Economists polled by IFR had predicted 3.500 million continuing jobless claims.
