Firmer But Quiet on Yom Kippur Holiday

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With many market participants away in observance of the Yom Kippur holiday, trading was light and tax-exempts were unchanged to slightly firmer yesterday.

"It's a little bit firmer right now, but it's quiet," a trader in New York said. "With the Jewish holiday today, there's just not many people around, and there's not a ton of trading."

"It's fairly quiet out there," a trader in Los Angeles said. "There's just not a lot trading. I do think we're a little bit firmer - you can pick up a basis point or two in spots - but it's just quiet, with not a lot of activity."

The Treasury market showed some gains yesterday. The yield on the benchmark 10-year note, which opened at 3.32%, was quoted near the end of the session at 3.29%. The yield on the two-year note was quoted near the end of the session at 0.98% after opening at 0.99%, and the yield on the 30-year bond, which opened at 4.09%, was quoted near the end of the session at 4.03%.

The Municipal Market Data triple-A scale yielded 2.57% in 10 years and 3.52% in 20 years yesterday, extending and matching their record lows, respectively, following yields of 2.57% and 3.52% on Friday.

As of Friday's close, the triple-A muni scale in 10 years was at 77.5% of comparable Treasuries, according to MMD, while 30-year munis were 96.1% of comparable Treasuries. Thirty-year tax-exempt triple-A rated general obligation bonds were at 99.7% of the comparable London Interbank Offered Rate as of Friday's close.

The official start of the fourth quarter will be marked by some brisk new-issue activity this week as several large financings - led by two significantly sized Build America Bond deals in California and New York - come to market.

The deals are part of an estimated $7.98 billion of issuance scheduled for the week, according to Ipreo LLC and The Bond Buyer. Last week, the market saw a revised $4.08 billion of new long-term volume, according to Thomson Reuters. In addition, an $8.8 billion sale of revenue anticipation notes was sold by California in what was the second largest note sale on record.

This week, the Golden State remains in the spotlight with a $1.4 billion sale of general obligation bonds from the Los Angeles Unified School District. Designated as taxable BABs, joint book-runners Citi and Goldman, Sachs & Co. will price the bonds on Thursday with a structure maturing in 2027, 2029, and 2039.

Citi and Goldman will also serve as senior-manager and co-senior manager, respectively, for a $181 million series of traditional tax-exempt GO bonds also being priced for the LAUSD this week. Retail investors will get first crack at the tax-exempt bonds tomorrow ahead of Thursday's official pricing. The series consists of mostly serial bonds. The BABs and the tax-exempt GOs are rated Aa3 by Moody's Investors Service and AA-minus by Standard & Poor's.

New York City will make its debut in the BAB market this week with $800 million of GO debt being senior managed and priced by Morgan Stanley. In addition to the BABs, the city also plans to sell $130 million of traditional taxable debt this week with Morgan as book-runner. The sales dates had not yet been announced as of press time. Although the structure of the bonds were also still being hammered out late last week, the city's BABs will have shorter as well as longer maturities, according to officials.

Besides the taxable debt, the city also plans to sell $900 million of traditional tax-exempt refunding bonds tomorrow when senior manager Bank of America Merrill Lynch prices the deal. New York City's GOs are rated Aa3 by Moody's, AA by Standard & Poor's, and AA-minus by Fitch Ratings.

Also, the New York State Thruway Authority is planning to issue $521 million of local highway and bridge service contract revenue bonds in a negotiated deal being led by Citi. The firm will price the deal Thursday following a retail order period tomorrow, with a serial structure that matures from 2011 to 2021. The bonds are rated AA by Standard & Poor's and A-plus by Fitch.

Morgan Stanley Smith Barney's George Friedlander wrote in a weekly report "since issuance in the sectors the high-yield funds purchase has been relatively light, the need for the high-yield funds to get their cash invested has pulled yields down on the limited supply of paper available in the primary and secondary markets."

"We note that the strong appetite for munis is not centered exclusively in the fund space," he wrote. "While direct retail buying has receded a bit as a result of rate shock, there are two other categories which are difficult to quantify, but which have been seeing very strong demand. These are the separately managed accounts at investment counselor firms, including bond fund-manager firms, and bank trust departments. Putting all of these buying sectors together, and you get a rally of massive proportions, particularly with tax-exempt issuance light. The appetite for yield also showed in the $8.8 billion California revenue anticipation note deal this week, which drew strong demand during the retail order period."

In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote "tight supply in the municipal market continues to create scarcity and thin trading conditions, forcing yields to record low levels as investor inflows and inquiry remain strong."

"And although a one-directional market is rarely sustainable in the medium term, most market participants appear to expect the current rally to continue for the foreseeable future," he wrote. "This creates some risk in overly aggressive positions.

"Last week, the exceptionally strong pricing of California's Ran sale graphically demonstrated the desperation for yield among individual and institutional investors," Fabian wrote.

"This was a solid issuance for the state but buyers may be carrying more price risk than they realize. For the week ahead, a reasonably large calendar with solid names will give dealers more product to feed what increasingly feels like a yield- and structure-insensitive demand component; strong trading execution will likely invite prices higher once again. There are several large BAB issues as well, in particular in California; that state is dominating the new market and the nearly $20 billion in federal money encumbered through the program."

The economic calendar was light yesterday.

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