The municipal market was slightly firmer yesterday. Traders said tax-exempt yields were flat to lower by two or three basis points.
"We're a bit better right now, probably a good two or three basis points, maybe even a little more in some spots," a trader in New York said. "The shorter [paper] is actually doing a little better right now than the [paper] out long. We also have a decent amount of supply coming this week, so we'll see if the firmness holds through the week."
The Treasury market showed gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.74%, finished at 3.68%. The yield on the two-year note was quoted near the end of the session at 1.20% after opening at 1.21%. The yield on the 30-year bond, which opened at 4.23%, finished at 4.20%.
A pair of deals from issuers in Massachusetts and California will headline this week's primary market, where an estimated $4.32 billion is expected to offer the largest - and most notable - increase in new-issue volume since the recent economic turmoil that put the municipal market in a deep freeze over the last six to eight weeks. This week will see an estimated $3.37 billion in negotiated sales, which is a jump from last week's revised $2.48 billion, according to Thomson Reuters.
This week, the largest negotiated deal will be $553 million of Massachusetts general obligation refunding bonds being priced today by Citi with a structure that includes serial bonds maturing from 2009 to 2023 and term bonds in 2028 and 2032. The bonds have ratings of Aa2 from Moody's Investors Service and AA from Standard & Poor's and Fitch Ratings.
That deal will be followed by a $523 million California Department of Water Resources sale of power supply revenue bonds - a remarketing of a 2005 issue and a conversion of auction-rate securities to fixed-rate debt. JPMorgan will price the deal on Thursday, following a retail order period tomorrow, and will offer four series of bonds and four bullet maturities in 2016, 2018, 2021, and 2022.
The deal includes Series 2005F-3, which is sized at $150 million, Series 2005F-5, which is $200 million, Series 2005G-4, which totals $98 million, and Series 2005G-11, which is $75 million. The bonds are rated Aa3 by Moody's and A-plus by Standard & Poor's and Fitch.
In the new-issue market yesterday, JPMorgan priced for retail investors $169.8 million of higher educational facilities second program bonds for the Tennessee School Bond Authority. The bonds mature from 2009 through 2028, with term bonds in 2033 and 2038.
Yields range from 1.25% with a 4% coupon in 2009 to 5.09% with a 5% coupon in 2028. Bonds maturing from 2024 through 2027 and in 2033 and 2038 were not offered during the retail order period. The bonds, which are callable at par in 2018, are rated Aa2 by Moody's and AA by both Standard & Poor's and Fitch.
In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, wrote that he expects "investors moving out of cash to focus on munis."
"Our economists expect fed funds to drop to 0.50% or lower as the Fed and other central banks worldwide continue to cut rates in their efforts to stop the economic swoon," he wrote. "When conditions are normal, this kind of action by central banks would typically compel investors to come out of their foxholes and take on additional risk, in an attempt to maintain returns. This cycle, however, is far from normal, with the stock market in a swoon, most taxable markets away from Treasuries still virtually locked, and investors increasingly fearful that patterns could worsen."
"In this environment, individual investors have tended to divide alternatives to the painfully low yields on cash into two categories: 'friend' or 'foe,' " Friedlander continued. "In the former category are the limited number of alternatives to cash that are perceived as having relatively low risk of further price erosion. In the latter category is virtually everything else. Relatively short-maturity, very high-quality municipals have moved into the 'friend' category, putting downward pressure on yields.
"The availability of shorter intermediate munis in the secondary market has dwindled, adding to the downward pressure. Since the beginning of November, the yield on five-year high-grade munis has dropped by 42 basis points, compared with 16 basis points on 20-year paper and 10 basis points in 30-years."
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote that this week: "Supply is again moderate, the economic release calendar focuses on what should be benign inflationary influences, and the economic crisis may reasonably continue to stoke retail demand for munis."
"However, similar price improvements as in the last few weeks may be hard fought, as individual investors are likely to stem buying as nominal yields shift lower," he added. "Indeed, we expect that yields are more likely biased higher, led by the long end of the yield curve, as trading levels continue to look overly aggressive."
In economic data released yesterday, industrial production in the nation was up 1.3% in October while capacity utilization rose to 76.4. The rise in production level followed a 3.7% decrease the previous month, while September capacity use was revised down to 75.5 from 76.4. Thomson had forecast a 0.2% increase for production, and a 76.4% level for capacity utilization.
The Empire State Manufacturing Survey's general business conditions index declined to negative 25.43 in November from negative 24.62 in October. Economists surveyed by Thomson Reuters had expected the index would be negative 26.00.
Today, the October producer price index will be released, followed by October consumer price index, October housing starts, and building permits tomorrow. On Thursday, initial jobless claims for the week ended Nov. 15 will be released, along with continuing jobless claims for the week ended Nov. 8, and the October index of leading economic indicators.
Economists polled by Thomson Reuters are predicting a 1.7% decline in PPI, a 0.1% rise in PPI core, a 0.7% drop in CPI, a 0.1% uptick in core CPI, 780,000 housing starts, 780,000 building permits, 505,000 initial jobless claims, and 3.920 million continuing jobless claims.
