The municipal market was weaker yesterday, following Treasuries, which fell due to increased supply from a $36 billion auction of two-year notes and stock market gains on news of Citigroup's planned $20 billion bailout.
Traders said tax-exempt yields were higher by three or four basis points.
"We're definitely seeing some losses, and the tone is definitely weaker," a trader in New York said. "We're not off by more than four basis points or so, but it's pretty much across the board. Treasuries are down, and we're down right with them."
"The market wasn't extremely active, not that we were expecting as much, given the holiday later this week," a trader in Los Angeles said. "But we were pretty much weaker across the board. A good three or four basis points off. Basically just following Treasuries."
The Treasury market showed losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.19%, finished at 3.34%. The yield on the two-year note was quoted near the end of the session at 1.22% after opening at 0.98%. The yield on the 30-year bond, which opened at 3.70%, was quoted near the end of the session at 3.78%.
The Treasury Department yesterday auctioned $36 billion of two-year notes with a 1 1/4% coupon at a 1.269% yield, a price of 99.96. The bid-to-cover ratio was 2.08. Federal Reserve banks also bought about $2.5 billion for their own account in exchange for maturing securities.
There will be few deals in the tax-exempt primary market for investors to digest this week as many issues will wait until after the Thanksgiving holiday. The result will be a drop in volume to an estimated $2.25 billion after reaching as high as $5.09 billion last week - the strongest in several weeks after supply gradually inched its way up amid the nation's ongoing fiscal recovery effort, according to data from Thomson Reuters.
Negotiated volume is estimated to be $2.11 billion this week versus $5.04 billion last week, while competitive sales will total $135.8 million compared with $496.5 million last week, according to the data.
The seasonal slump will put the anticipated sale of mental health facilities revenue bonds from the Dormitory Authority of the State of New York in the spotlight when JPMorgan prices the $326 million offering today.
The deal will consist of a Series 2008F tentatively structured to mature serially from 2009 to 2018 with term bonds in 2023, 2028, and 2031, and Series 2008G set to mature serially from 2009 to 2018 with a term in 2025. The bonds are rated AA-minus by Standard & Poor's and A-plus by Fitch Ratings.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote that the "municipal market may have reached another inflection point."
"To date, and including last week, bonds rated AA and better have been well received with individual investors providing the lion's share of demand. Underwriters have brought a modest, well-received calendar of mostly high-grade names," Fabian wrote. "This has pushed benchmark yield curves generally lower, in particular within 10 years, where individuals are generally most comfortable owning bonds. In addition, an increasing scarcity of money fund-acceptable floating rate paper has driven the seven-day yield below 1% - a 700 basis point decline in just eight weeks."
"Yet," Fabian continued, "there has been no systematic institutional demand, with mutual funds facing continued net redemptions, non-financial corporations needing less tax-exempt income as the recession deepens, and arbitrage programs either shut down or sidelined. The institutional absence has eroded secondary trading liquidity and left lower-rated, longer-maturity paper without an effective bid side. Credit and maturity spreads have widened dramatically, with little sign of improvement since the crisis began in September."
In the new-issue market yesterday, Wachovia Bank NA priced $200 million of revenue bonds for the Municipal Gas Authority of Georgia. The bonds mature in December 2009, yielding 1.35% with a 2.5% coupon. The short-term bonds are rated MIG-1 by Moody's Investors Service, SP-1-plus by Standard & Poor's, and F1-plus by Fitch. The long-term credit is rated A1 by Moody's, AA-minus by Standard & Poor's, and A-plus by Fitch.
Minnesota's Independent School District No. 877 competitively sold $21 million of general obligation refunding bonds to Hutchinson, Shockey, Erley & Co. with a true interest cost of 4.12%. The bonds mature from 2010 through 2022, with yields ranging from 2.00% with a 4% coupon in 2010 to 4.80% with a 5.125% coupon in 2022. Bonds maturing from 2019 through 2021 were not formally re-offered.
In economic data released yesterday, existing home sales decreased 3.1% in October to a seasonally adjusted 4.98 million-unit rate. The sales drop to 4.98 million compared to the 5.000 million unit pace predicted by Thomson Reuters' poll of economists, and followed a revised 4.7% rise to a 5.14 million unit level in September.
Additional economic data will be released during the holiday-shortened week. Today, the preliminary third-quarter gross domestic product and November consumer confidence index are released. Tomorrow, indicators such as October personal income and consumption - including the core personal consumption expenditures deflator, the final November University of Michigan consumer sentiment index, and October new home sales - will all be released.
Economists polled by Thomson are predicting a 0.5% decline in GDP, a 38.0 consumer confidence index, a 0.1% rise in personal income, a 0.9% drop in personal consumption, no change to the core PCE deflator, a 57.9 Michigan sentiment index, and 450,000 new home sales.
