The municipal market was slightly firmer in light activity yesterday, as the market opened to begin the final week of the year.
"The market definitely has a firmer tone, but it's a little thin," a trader in Chicago said.
"Kind of just keeping the doors open, and the market is quiet today," a trader in California said. "People are either out of the office or just want to get through to the new year."
The Treasury market was firmer. The yield on the benchmark 10-year Treasury note, which opened at 2.14%, was recently quoted at 2.10%. The yield on the two-year note was quoted recently at 0.77%, after opening at 0.89%. And the yield on the 30-year bond, which opened at 2.63%, was quoted recently at 2.57%.
New-issue activity this week is light. Today, Banc of America Securities LLC will price $17 million of daily variable-rate pollution control revenue refunding bonds for Forsyth, Mont., subject to the alternative minimum tax.
In addition, three competitive deals with a combined value of $6.3 million will come to market.
Airmont Village, N.Y.'s $1.5 million of public improvement bonds, Ithaca, N.Y.'s $1,09 million of public improvement and federally taxable bonds, and the Harris County, Tex., Municipal Utility District No. 391's $3.7 million of unlimited tax bonds will all sell competitively.
In his weekly report, Municipal Market Advisors managing director Matt Fabian said that three factors have helped pull down yields in the limited trading taking place to end the year.
First, people expect a rally at the beginning of 2009 and are stocking up ahead of time, he wrote. The market may experience an influx of demand from institutional investors once the new year begins, he said, as companies that have wrapped up their year-end balance sheets feel comfortable taking risks again.
Second, he believes some people are buying certain munis ahead of a "roll" into a more attractive maturity, such as an 11-year bond that becomes a benchmark 10-year bond on Jan. 1.
Lastly, he said, some investors are buying bonds to push up price evaluations in their portfolios at year-end.
These factors are likely to continue through the end of 2008, pushing prices up and yanking yields down, he said.
Fabian, though, does not foresee a meaningful restoration of demand in the muni market anytime soon. Munis will have trouble generating "generic" corporate interest, he said, because earnings will be weak and there will therefore not be much need to shelter profits from taxes.
Without "extraordinary support via legislative change," interest rates will have to spike to "restore demand and finance the massive current borrowing needs of state and local issuers," he said.
States face a combined deficit of $89 billion this fiscal year, and the collective budget gap through fiscal 2011 is expected to exceed $350 billion, according to the Center on Budget and Policy Priorities.
The economic calender was light yesterday, with few indicators set to be released this week. Today, the Chicago purchasing managers index will be released, with economists polled by Thomson Reuters expecting a reading of 33.0. Consumer confidence data will also be released, with economists predicting a reading of 45.0.
Mark Vitner, senior economist at Wachovia Corp., said neither the consumer confidence report nor the manufacturing index is likely to reflect much new information about the economy. Consumer confidence may tick up a bit because of lower gasoline prices, while manufacturing likely continues to show "pretty intense weakness, mostly in the auto sector," he said.
Vitner expects to see "economic activity pull back on virtually every front" through the first half of next year. He anticipates an end to the recession in June or July. The group responsible for tracking business cycles, the National Bureau of Economic Research, earlier this month declared a recession began last December.
However, Vitner sees the end of recession as merely a technical distinction. The economy is likely to remain sluggish for a while even after it stops shrinking, he said. He does not expect a meaningful economic recovery until mid-to-late 2010.
Meanwhile, he expects the unemployment rate to peak at 9%. He anticipates gross domestic product will contract 5.5% in the fourth quarter this year and 2% for 2009, with most of the decline in the first half of the year.
