The municipal market was weaker yesterday following a three-day holiday weekend. Traders said tax-exempt yields in the secondary market climbed about three or four basis points overall.
“We’re cheapening up a bit again,” a trader in New York said. “We’re probably down three, maybe four basis points right now. Basically just picking up where we left off at the end of last week. The market is still correcting itself from all that firmness, and we probably have a bit further to go. There isn’t much going on in the secondary, but I think a lot of people want to try and wait this out a bit. I don’t think people are really looking to do too much out there unless they have inventory they really need to move.”
“There really isn’t much going on in the secondary right now, but we’re clearly weaker,” a trader in Los Angeles said. “Probably three basis points at least, maybe a bit more in spots. We’ve just sort of been getting progressively weaker the past few sessions.”
The Treasury market showed gains yesterday. The yield on the benchmark 10-year note, which opened at 3.38%, finished at 3.32%. The yield on the two-year note finished at 0.89% after opening at 0.96%. The yield on the 30-year bond, which opened at 4.23%, finished at 4.17%.
Also yesterday, the Municipal Market Data triple-A scale yielded 2.92% in 10 years and 3.66% in 20 years, following levels of 2.76% and 3.54%, respectively, Friday.
As of Friday’s close, the triple-A muni scale in 10 years was at 82.9% of comparable Treasuries, according to MMD, while 30-year munis were 93.9% of comparable Treasuries. Thirty-year tax-exempt triple-A rated general obligation bonds were at 96.6% of the comparable London Interbank Offered Rate.
In the new-issue market, the state of Washington expects to issue $1.376 billion of taxable and tax-exempt general obligation debt today. The deals include $875.7 million of new-money and refunding tax-exempt GOs and $500 million of taxable Build America Bonds. The tax-exempt bonds will be priced competitively and are expected to be issued in three series. The $229 million of Series C bonds will be issued as new money. The $417 million of Series R-2010B will be issued as various-purpose refunding bonds. The $227 million of Series R-2010C bonds will be refunding bonds.
The $500 million taxable portion will be the state’s first issuance of BABs. The bonds will also be the state’s first negotiated deal in 13 years. Goldman, Sachs & Co. and JPMorgan will serve as co-lead underwriters. The BABs will be backed by fuel and general taxes. Maturities are expected to be determined at pricing. The taxable and tax-exempt bonds are rated Aa1 by Moody’s Investors Service, AA-plus by Standard & Poor’s and AA by Fitch Ratings.
The New York City Transitional Finance Authority expects to issue $881 million of tax-exempt bonds and BABs tomorrow. The TFA said in a statement that it will issue $800 million of fixed-rate new money bonds that carry a subordinate lien. About $140 million of the debt will be priced as tax-exempt bonds that are expected to mature in 10 years or less.
About $660 million of debt will be sold as longer-maturity BABs. Additionally, the TFA expects to convert $81 million of variable-rate demand bonds to fixed rate. The tax-exempt bonds will mature between 2011 and 2016. Goldman will serve as senior underwriter. The TFA is rated Aa1 by Moody’s, AAA by Standard & Poor’s, and AA-plus by Fitch. Moody’s rates the subordinate bonds Aa2.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote “the municipal market has been repricing to higher yields over the last 10 days as the new quarter is encouraging institutional buyers to take gains.”
“With buyers appearing to pull back farther than sellers are willing to concede, overall trading volumes have slowed,” he wrote. “Still, it appears that municipals still feature sustainable price support from both demand — via individuals, managers, and banks, albeit at somewhat higher yields — and supply — as BAB issuance may reasonably increase going forward.
“The last point is supported by the large California loan last week which, although needing to be dramatically cheapened from preliminary estimates, still saw better net execution in the taxable BABs than in the tax-exempt portion,” Fabian continued. “The market does not appear to have cheapened so as to induce a new round of deleveraging. This week features another large calendar but relatively fewer BABs. Buyers may be diffident, although a weak retail sales reading today could help Treasuries and drag municipals along as well. That is, if municipals will continue to trade in parallel with taxables.”
Fabian also wrote that “last week’s municipal market continued the sell-off that began on Oct. 1,” and that “this was a bear steepening adjustment: intermediate and long bonds were the largest losers, while the curve within 10 years held up better.”
“Weakness thus appears to be following institutional gains taking following the speculative excesses of August and September via record low nominal yields, aggressive coupon structures, and tightening credit and term spreads,” Fabian wrote. “Up until this point, accounts had been reluctant to sell-fearing ever-rising prices — but the start of a new quarter has once again allowed increased — this time, reinvestment — risk taking.”
George Friedlander, muni strategist at Morgan Stanley Smith Barney, wrote in a weekly report that most investors should view the weakening market as good news, “in that yield levels had become almost painfully low going into the end of September.”
He wrote that, in addition to a heavy new-issue calendar, there were “at least five other factors contributing to the weaker muni market.”
“These included a weakening of the long-term Treasury market late in the week,” Friedlander wrote, “increasing retail investor rate shock, declining dealer willingness to buy blocks on the bid side and hold new-issue balances, attempts by many individual investors to lock in profits on muni positions that had run up sharply since May, concerns about credit in an environment with tighter credit spreads, and ongoing uncertainty regarding the amount of help states and schools will get once the stimulus package sunsets — which for state and local governments, would generally occur in the middle of fiscal year 2011.”
