The municipal market was slightly firmer yesterday and traders said tax-exempt yields were lower by two or three basis points overall.
“There’s not a whole lot going on right now,” a trader in New York said. “But we’re definitely getting a bit more expensive on the long end, in particular. There’s still a demand for more paper out on the Street, and I think people are looking forward to more of the new issues coming out this week. Right now, we’re probably about three basis points more expensive, on the whole.”
“There is a bit of firmness out there, but it’s just pretty quiet overall,” a trader in Los Angeles said. “With the [Veterans Day] holiday on Wednesday and the light calendar for the most part, aside from the [$1.5 billion California Statewide Communities Development Authority deal], there probably won’t be too much going on this week, but it is definitely a touch firmer out there today, more so on the long end, a couple of basis points in spots.”
The Treasury market was mixed yesterday. The yield on the benchmark 10-year note opened at 3.50% and was quoted near the end of the session at 3.48%. The yield on the two-year note opened at 0.84% and was quoted near the end of the session at 0.86%. The yield on the 30-year bond was quoted near the end of the session at 4.39%, after opening at 4.40%.
Yesterday’s Municipal Market Data triple-A scale yielded 3.01% in 10 years and 3.82% in 20 years, matching levels of 3.01% and 3.82%, respectively, Friday. The scale yielded 4.24% in 30 years yesterday, matching Friday’s level.
As of Friday’s close, the triple-A muni scale in 10 years was at 85.8% of comparable Treasuries, according to MMD, while 30-year munis were 96.1% of comparable Treasuries. Also, as of Friday’s close, 30-year tax-exempt triple-A rated general obligation bonds were at 99.5% of the comparable London Interbank Offered Rate.
For the third week in a row, a California issuer will dominate the primary market spotlight, with a $1.5 billion financing. However, activity within the rest of the new-issue market is expected to be relatively light as evidenced by an estimated $5.65 billion of new long-term volume, according to Ipreo LLC and The Bond Buyer, noticeably less than last week’s nearly $9 billion bounty.
The largest deal on the negotiated calendar is the $1.5 billion revenue bond sale from the California Statewide Communities Development Authority that will account for roughly one-third of the $4.31 billion of long-term negotiated volume estimated by Thomson Reuters.
Underwriters at Goldman, Sachs & Co. yesterday concluded a two-day retail order period, which began last Friday, and expect to officially price the deal for institutions today with a single maturity due in 2013. Retail pricing was unavailable by press time. The bonds are rated Baa1 by Moody’s Investors Service, A by Standard & Poor’s, and BBB by Fitch Ratings.
In the new-issue market yesterday, the Suffolk County, N.Y., Water Authority competitively sold $166.4 million of bonds in two series, including $100 million of taxable Build America Bonds.
The BABs were sold to Barclays Capital, with a true interest cost of 5.78%. The bonds mature in 2035, yielding 5.72% with a 5.5% coupon, or 3.58% after the 35% federal subsidy.
The $66.4 million tax-exempt series was sold to Prager, Sealy & Co., with a TIC of 4.36%. The bonds mature from 2011 through 2035, with yields ranging from 1.00% with a 5% coupon in 2011 to 4.75% with a 4.625% coupon in 2035.
Bonds maturing from 2017 through 2019, and in 2026, 2028, 2031, and 2032 were not formally re-offered. The bonds, which are callable at par in 2019, are rated AA-plus by Standard & Poor’s and Fitch.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote: “Although high-grade yields are little changed over the last 10 days, there is a more cautious tone among participants because fund flows have slowed and, with California flooding the new-issue market with higher-yielding paper, spread paper is cheapening to stay competitive.”
“To offset potential losses, bidders have retreated while sellers have attempted to hold their ground,” he wrote. “This makes things more difficult for issuers in the primary, who must sell to the bid side at deeper and deeper concessions to where even parity bonds are trading in the secondary market.”
“Yet we expect that the downside for high grade paper is limited as the current investor mix will favor higher rated, shorter maturity paper once again,” he said. “And the structural demand improvements created by the [American Recovery and Reinvestment Act] — most notably the better economics for bank purchases — haven’t gone away and should support better-quality paper.”
“This week,” Fabian said, “California brings another massive loan, this time to directly help paper over the re-widening fiscal year 2010 budget gap. Initial sales have been slow, but the holiday-shortened week will make things difficult. Otherwise, activity should be very limited.”
Also, in another weekly report, George Friedlander, muni strategist at Morgan Stanley Smith Barney, wrote that while “yields in the triple-A muni market were virtually unchanged” last week according to MMD, “the market appeared to be somewhat weaker than that in various components of the market that trade at a substantial spread to the triple-A scale.”
“The yield on Assured Guaranty/[Financial Security Assurance] insured bonds had bounced sharply during the first three weeks in October, from the 4.25% range up to 5%, and over the past two weeks, it has moved roughly 10 basis points higher than that,” he wrote. “California state GO paper has weakened by as much as 20 to 25 basis points over the past week, in an environment of very heavy new-issue supply and ongoing budgetary concerns.”
“Most larger new issues are coming at significantly higher yields than offering levels on similar or identical credits in the secondary market, as dealers remain averse to adding to inventory and new issues are thus often being 'priced to sell,’” Friedlander wrote.
The economic calendar was light yesterday.
