The municipal market was weaker by about three basis points overall yesterday. Traders said tax-exempt yields were up anywhere from two to five basis points, with the bulk of the losses coming on the long end of the scale."It's fairly quiet coming off the weekend. Things are cheapening up a bit on the long end, but trading is pretty scarce on the short end, so it's hanging tight," a trader in New York said.
"We got progressively weaker as the day went on, and really, it gets progressively weaker the further along the curve you go," a trader in San Francisco said. "It's probably a basis point or so cheaper on the short end, but as much as maybe four or five out long, maybe even six depending on the credit. Overall though, I'd call it about three basis points weaker."
Roughly $7.1 billion of debt is expected in the primary market this week. Among the largest deals is a $600 million New York Transitional Finance Authority building aid revenue bond sale. It is expected to be priced tomorrow by Citi and is structured with serial bonds maturing from 2011 to 2029 and term bonds in 2034 and 2039. Citi began offering the bonds to retail investors yesterday, with a high yield of 5.30% with a 5.25% coupon in 2039. The credit is rated A1 by Moody's Investors Service and AA by Standard & Poor's.
The Treasury market showed losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.46%, finished at 3.68%. The yield on the two-year note was quoted near the end of the session at 0.97%, after opening at 0.91%. And the yield on the 30-year bond, which opened at 4.33%, finished at 4.53%.
As of Friday's close, the triple-A muni scale in 10 years was at 85.6% of comparable Treasuries, according to Municipal Market Data. Also, 30-year munis were 104.6% of comparable Treasuries, and as of Friday's close, 30-year tax-exempt triple-A rated general obligation bonds were at 113.8% of the comparable London Interbank Offered Rate.
In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, wrote that the muni market's resistance to continually rising Treasury yields ended last week, as tax-exempt yields crept steadily higher.
"For much of the period since mid-March, the municipal bond market impressively resisted the tug of higher Treasury yields," he wrote. "For seven of the eight weeks" before last week, "long-term muni yields declined, despite an increase in 10- and 30-year Treasury yields of 66 and 69 basis points, respectively. Finally, [last] week the continuing move toward higher Treasury yields appeared to be too great to overcome. With the two long-term benchmark yields up another 30 and 22 basis points, respectively, yields all along the high-grade muni yield curve moved higher as well, up from 10-12 basis points on shorter intermediates to roughly 20 basis points from 15 years on out."
However, "it is important to note ... that sectors experiencing a shortage of new issue paper did not back off nearly as much," he wrote. "This includes much of the high-yield sector: Triple-B hospital yields were roughly unchanged in the 7.50% range for general market issues, while higher-rated hospitals saw the 20 basis point bounce experienced in the high-grade sector."
Matt Fabian, managing director at Municipal Market Advisors, wrote that because "low yields and tight spreads suddenly appeared too low amid the faltering Treasury market," munis reversed recent gains last week.
"Investors needing to sell bonds found a much thinner group of buyers who were using their advantage to bid prices lower," he wrote. "However, with the start of June, most participants are expecting a return to rally conditions this week, fueled by the reinvestment of principal and interest payments and new purchases by the surging mutual funds. Still, we expect any rally will be modest, as a stronger stock market is likely to capture some portion of reinvestment dollars, and yields on the bonds favored by individuals remain undeniably low. Yet there is upside in an uncertain Treasury market.
"Last week's Treasury losses followed, if anything, expectations of more supply to fund incremental stimulus/bailout of a weaker economy, along with worries over the future value of the dollar by China and other Asian central bank buyers," Fabian wrote. "In the last few months, this kind of Treasury weakness has driven strong muni outperformance and attracted institutional buyers who should reasonably be tempted to keep those positions engaged in the near term."
In economic data released yesterday, personal income rose 0.5% in April, after a revised 0.2% decline the previous month.
Meantime, spending on construction projects rose 0.8% in April, to $968.7 billion. Also, the Institute for Supply Management's business activity composite index climbed to 42.8 in May, from 40.1 in April.
