Munis Weaker Despite Treasury Gains

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The municipal market was weaker yesterday despite Treasury gains. Traders said tax-exempt yields were higher by about five basis points.

"We're sort of drifting. I mean, there's some trading going on, but there's no real bid side out there," a trader in New York said. "It's just becoming more of an execution-type market, where if you have a customer looking for bonds, you can work a trade, but otherwise, it's really kind of dead without that. It's hard to trade when you've got no place to put the bonds and you've got a good chance of losing money on them."

"I've seen it worse, but it seems like it's kind of drifting. Maybe it's finding its equilibrium," the trader said. "But there's very little you can do to make any money. You're better off just sitting and watching."

A trader in Los Angeles said the market of late has been a reminder of "what it felt like in March and April of 1987, when it was like trying to catch a falling anvil."

"It was like if you bought them on a Monday at six basis points, you sold them on Wednesday at seven basis points. It just feels like that," the trader said. "It's one of the most unusual periods of time that I can ever remember, but very much like 1987."

"It just feels squishy," the Los Angeles trader continued. "The Treasury is going in one direction, munis are going in another, and it's just so unusual. The long end is probably off about five basis points, but if you wanted to get a bid on any specific bond, it could off far more than that."

The Treasury market showed some gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.80%, finished at 3.77%. The yield on the two-year note was quoted near the end of the session at 1.92% after opening at 2.07%. The yield on the 30-year Treasury finished at 4.38% after opening at the same level.

Meanwhile, the Treasury Department yesterday auctioned $34 billion of two-year notes with a 2% coupon at a 2.12% yield, a price of 99.778. The bid-to-cover ratio was 2.21. Federal Reserve banks also bought $3,150,451,800 for their own account in exchange for maturing securities.

The market gave a "solid reception" to the record amount of notes for auction, according to Ian Lyngen, an interest rate strategist at RBS Greenwich Capital. In addition, yields on the front end of the Treasury curve continued to fall, steepening the curve to almost 180 points, he said.

"Uncertainty in the near term is unfortunately the theme," Lyngen said.

More deals were postponed in the primary market yesterday, following a string of postponements, cancellations, and size reductions in the new-issue market due to the extreme volatility seen since last Monday. The uncertainty developed after the news of Lehman Brothers Inc.'s bankruptcy and subsequent agreement to sell virtually all its North American businesses and operating assets to Barclays Capital, which coincided with Bank of America's planned purchase of Merrill Lynch & Co.

Those events were then topped off by the news that the Federal Reserve decided on an $85 billion bailout of American International Group Inc. as well as the announcement of an overall market rescue plan by federal officials last Friday.

An $85 million tax anticipation note deal for the Palm Beach County, Fla., School District, scheduled to competitively sell today, a $67.3 million competitive deal for the Virginia Public School Authority, scheduled to competitively sell today, and a $20.3 million negotiated general obligation refunding deal for Colorado's Highlands Ranch Metropolitan District, scheduled to be priced by Wachovia Bank NA, are among yesterday's postponements.

This follows Tuesday, when a number of additional deals were postponed, the largest of which was a $105 million bond anticipation note deal for the Fairfax County, Va., Redevelopment and Housing Authority, which was scheduled to sell competitively yesterday. Also postponed was a $42 million general obligation deal for the Charleston County, S.C., School District scheduled to competitively sell today, and a $10 million competitive Ban deal for Plainville, Conn., scheduled to sell yesterday, which was in fact cancelled.

The Brevard County, Fla., School District, however, was able to move forward yesterday with its $35 million competitive tax anticipation note sale. The bonds were sold to Citi with a net interest cost of 2.53%. The Tans, which mature in June 2009, yield 2.50% with a 4% coupon. The credit is rated MIG-1 by Moody's Investors Service.

This week's volume was expected to be an estimated $2.41 billion coming into week, compared with a revised $2.43 billion last week, according to Thomson Reuters. That follows $17.07 billion being sold in the municipal market in September through last Friday. However, according to Thomson Reuters, with about $800 million of bonds being sold Monday and Tuesday, and about $1.4 billion still estimated for the remainder of the week, the revised estimate for this week's volume is about $2.2 billion for the week.

The Bond Buyer's one-year note index rose 26 basis points to 2.19% this week.

In economic data released yesterday, existing home sales came in at 4.910 million in August, after a revised 5.020 million the previous month. Economists polled by IFR Markets predicted 4.920 million existing home sales.

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