Munis Stronger on Sustained Treasury Rally

A sustained rally in the Treasury market continued to bolster municipals yesterday as a rekindling of fear pushed investors out of stocks and back into bonds.

Munis were about four basis points stronger, traders said.

A nagging concern that investors were too optimistic in bidding stocks up so high scared money back into Treasuries, said Eric Lascelles, chief economics and rates strategist at TD Securities.

The Standard & Poor's 500 Index leaped 40% between March 9 and June 12. It has since coughed up about 6.9%.

"It does speak to the return of risk aversion," Lascelles said. "The economic woes themselves are continuing to get worse. ... It's probably not going to be all that pretty."

Lascelles said many investors, recently arguing over whether the recovery would be "U-shaped" or "V-shaped," are contemplating a "W-shaped" recovery - meaning a drop back down after a brief rally, before fully recovering.

Evidence of a less-than-vigorous recovery includes the economy shedding 467,000 jobs last month, pushing the unemployment rate to 9.5%.

The VIX, known as the "fear index," ticked back above 30 after spending a few weeks in the 20s.

The 10-year Treasury yield, which broke 4% last month, has tumbled back down to 3.32% yesterday from 3.46% Tuesday.

"Between green shoots being recognized as weeds and earnings season about to start, there's just huge concerns for the next shoe to drop," a trader in San Francisco. "That's bringing money into the bond market. With stocks continuing to be weak, right now obviously it seems like the 10-year [Treasury] at least has an appointment with 3.25%."

Munis have followed suit. The ratio of muni yields to Treasury yields has remained mostly intact even as Treasury yields collapsed almost 70 basis points.

The ratio of 10-year triple-A yields to 10-year Treasuries was 93.1% yesterday, compared with 87.5% when stocks were at their recent peak, according to Municipal Market Data.

The yield on the 10-year triple-A plunged to 3.15% yesterday from 3.37% on June 12. Traders said yields continued to glide down yesterday.

Even California's bonds were better by one to three basis points, the San Francisco trader said, whereas lately it has mostly been a 49-state rally.

"The market's feeling pretty good," said a trader in New Jersey.

Trades reported through the Municipal Securities Rulemaking Board were stronger.

A customer bought a Port of Seattle passenger facilities charge revenue Series A bond maturing in 2023 at a yield of 4.62%. The same bond Tuesday yielded 5.01%.

A customer bought a Contra Costa County, Calif., pension obligation taxable Series A bond maturing in 2016 at a yield of 5.29%. The same bond Tuesday yielded 5.38%.

In the new-issue market, New York State Thruway Authority sold $680 million of general revenue bond anticipation notes, priced by Citi. The notes, which mature in 2011, are rated MIG-1 by Moody's Investors Service and SP-1-plus by Standard & Poor's.

In the long-term sector, Barclays Capital priced and repriced $116 million of Dormitory Authority of the State of New York revenue bonds for the University of Rochester.

In the $54 million Series 2009A, yields ranged from 4.09% in 2020 to 4.93% in 2029. A 2032 maturity containing $6.9 million was priced as 5s to yield 5.05% and a 2039 maturity comprising $21 million was priced as 5.125s to yield 5.17%. The series also contained a portion of deferred income bonds.

In the $34 million Series 2009B, yields ranged from 1.42% in 2011 to 4.83% in 2027. Yields in Series 2009C, which contains $10.6 million, ranged from 1.42% in 2011 to 4.74% in 2026. In Series 2009D, comprised of $3.6 million, yields ranged from 1.42% in 2011 to 2.24% in 2013. The final Series 2009E bonds, containing $13 million were priced to yield from 1.42% in 2011 to 4.74% in 2026.

Bonds due in 2010 in Series 2009B, C, D and E were subject to a sealed bid.

The bonds carried ratings of Aa3 from Moody's and A-plus from Standard & Poor's.

In addition, Morgan Stanley priced and repriced $77 million Southern Minnesota Municipal Power Agency power supply system revenue bonds.

Yields ranged from 1.75% in 2011 to 4.74% in 2022. A split 2024 maturity was priced as both 5s and 5.5s to yield 4.88% and a 2030 maturity was priced at par to yield 5.25%.

The bonds are rated A2 by Moody's and A-plus by Standard & Poor's.

Palm Beach County, Fla., sold $68 million of water and sewer revenue bonds. Yields ranged from 1.21% in 2011 to 4.35% in 2026. A 2033 maturity containing $18 million was priced as 5.25s to yield 4.89%, a 2039 maturity subject to an extraordinary optional redemption was priced as 5s to yield 5.10%, and a 2040 maturity containing $18 million was also priced as 5s to yield 5.10%.

The bonds are rated triple-A by Moody's, Standard & Poor's, and Fitch Ratings.

Michael Scarchilli contributed to this column.

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