The municipal market was unchanged to slightly firmer yesterday ahead of a full new-issue slate later this week.
Traders said tax-exempt yields were unchanged to lower by one or two basis points.
"I don't see a lot happening now. It's probably the quietest it's been in about the last week," a trader in New York said. "I wouldn't say it's weaker, but I don't know if I'd say it's firmer either. The market had to slow down at some point. It's traditionally slow on a Monday, and we do have some supply coming this week."
The Treasury market showed gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.53%, finished at 3.44%. The yield on the two-year note was quoted near the end of the session at 1.45% after opening at 1.52%. According to Municipal Market Data, 10-year triple-A GO municipal bonds yesterday were 93.3% of 10-year Treasuries.
In economic data released yesterday, merchant wholesalers posted a 0.8% increase in inventories in January, while sales soared 2.7% in the month. Inventories of merchant wholesalers rose to $414.8 billion, following an unrevised 1.1% increase to $411.5 billion in December. Meanwhile, sales of merchant wholesalers grew to about $387.7 billion, following December's revised 0.5% decrease to $377.4 billion. Economists polled by IFR Markets predicted a 0.5% increase in wholesale inventories, and 0.4% growth in wholesale sales.
In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, wrote: "Given the frozen conditions in the credit markets and the continued weakening of the U.S. economy, the Fed has considerable additional work to do."
The federal funds rate target currently stands at 3%, after already dropping 125 basis points in 2008.
"We would not be surprised to see fed funds at 2% or below in a short time," Friedlander wrote. " Such a shift would push short-term muni rates sharply lower as well, adding another 50 to 70 basis points to an already-steep slope on the muni curve."
Friedlander added that, "although the most enticing near-term bargains appear to have abated a bit, we recommend that investors take advantage of yields that are still high relative to taxable benchmarks, and to extend out along the yield curve."
"We would, however, use a bit longer time horizon to do so and look for pockets of opportunity if market weakness recurs or supply bulges create particular opportunities in a given state, sector, maturity, or rating category," he wrote.
Phil Fischer, municipal strategist at Merrill Lynch & Co., wrote in a report that, "the muni market is still in the process of absorbing the liquidation of several large, single-strategy hedge funds."
"While deleveraging was occurring much of the last month, on Thursday and Friday of last week the muni market accommodated the sale for cash of tens of billions of bonds," Fischer wrote. "However, the pricing adjustments resulting from this unprecedented event are still unfolding and relative values in munis are far from fair value."
Large issuers in California, New York, Texas, and Maryland will test the waters of the primary market this week as part of an estimated $8.2 billion in new-issue volume expected to debut as the market continues to grapple with ongoing turmoil in the auction-rate and credit sectors.
Two of this week's deals - including a $1.025 billion sale of power supply revenue bonds from the California Department of Water Resources - represent issuers' efforts to restructure their auction-rate debt as fixed rate as a means of seeking recovery from failed auctions that triggered widespread market dislocation and corresponding volatility nearly a month ago.
Heightening the market's already growing fears and uncertainty about the bond insurance market, Moody's Investors Service and Fitch Ratings late last week downgraded the financial strength rating of CIFG Assurance NA to A1 and AA-minus from triple-A, respectively. A Moody's report said the downgrade reflected its view on the insurer's exposure to subprime mortgage-related risk, weakened capital position, impaired business prospects, and a strategic direction.
In the new-issue market yesterday, Merrill Lynch priced $393.9 million of limited-tax schoolhouse bonds for the Houston Independent School District. The bonds mature from 2012 through 2028, with a term bond in 2033. Yields range from 2.83% with a 5% coupon in 2012 to 5.05% with a 5% coupon in 2033. The bonds, which are callable at par in 2017, are backed by the state's Permanent School Fund guarantee program. The underlying credit is rated Aa2 by Moody's and AA-plus by Standard & Poor's.
Also, a slate of economic data will be released later this week. February import prices will be released on Thursday, along with initial jobless claims for the week ended March 8, continuing jobless claims for the week ended March 1, February retail sales, January business inventories and sales. And on Friday, the February consumer price index will be released, as will the preliminary March University of Michigan consumer sentiment index.
Economists polled by IFR are predicting a 0.6% uptick in import prices, 358,000 initial jobless claims, 2.835 million continuing jobless claims, a 0.2% increase in retail sales, a 0.2% rise in retail sales excluding autos, a 0.5% jump in business inventories, a 0.3% drop in business sales, a 0.3% uptick in the CPI, a 0.2% increase in the core CPI, and a 69.5 Michigan sentiment reading.
