Though secondary market trading was light and Treasuries showed pronounced gains, tax-exempts yesterday extended their streak of rising yields to nine consecutive sessions, as the heftiest new-issue calendar in months awaits in the primary market.
Traders said muni yields were higher by two or three basis points overall.
"There's not a whole lot trading, but we're down a bit again," a trader in New Jersey said. "Basically, the same factors that have been weighing on the muni market for weeks are still there, and that's why we're still cheapening up on a daily basis. It's definitely not a slaughter in any way today, but a lot of these days recently haven't been. We just lose a basis point or two here, a basis point or two there. Though today, it's probably closer to three basis points than one or two. But it's still pretty quiet."
Weakness in the intermediate part of the curve was more pronounced than elsewhere, according to market participants.
"Certainly that seems to be the case today," a trader in Los Angeles said. "You go out real long or real short, and you're just about flat, maybe off a basis point if anything. But the steeper losses, the two, three, four basis point losses, you're seeing those about 10 or 15 years out the curve."
The municipal market is poised to see an estimated $5.16 billion in total new volume this week - the highest level in recent months - anchored by $510.5 million of general obligation bonds from Maryland, and a $450 million revenue issue from the California State University Trustees.
"I think it's possible the market changes directions this week, but I think it has a lot to do with how the market handles the supply we've got coming," a trader in New York said. "Not that it's a lot, but it's a bigger calendar than last week, and you've got a name like Maryland out there, so we'll see."
Last week, the market saw a revised $3.83 billion in total negotiated and competitive volume, according to Thomson Reuters.
Northeast activity will center on the Maryland GO sale, which has natural triple-As from all three rating agencies and includes $410 million of negotiated bonds and $100 million of competitive bonds. The negotiated portion of the deal is expected to be priced by Merrill Lynch & Co. today, and will precede the sale of at least $100 million of GOs from Maryland tomorrow in the competitive market.
Scheduled for pricing on Thursday by Barclays Capital after a retail order period tomorrow, the Cal State offering is the largest negotiated deal on the calendar and the largest in California this week. The bonds are rated Aa3 by Moody's Investors Service and A-plus by Standard & Poor's.
Activity in the new-issue market was light yesterday, however.
The Treasury market showed flight-to-quality gains yesterday after American International Group Inc. posted fourth-quarter losses in excess of $61 billion and the Dow Jones industrial average fell below 7,000 for the first time since 1997.
The yield on the benchmark 10-year note, which opened at 3.02%, finished at 2.88%. The yield on the two-year note was quoted near the end of the session at 0.88% after opening at 0.97%. The yield on the 30-year bond, which opened at 3.71%, was quoted near the end of the session at 3.61%.
As of Friday's close, 10-year tax-exempt bonds were trading at 102.0% of comparable Treasuries, according to Municipal Market Data. Additionally, 30-year munis were trading at 130.1% of comparable Treasuries. Also, as of the close Friday, 30-year tax-exempt triple-A GOs were trading at 140.3% of the comparable London Interbank Offered Rate.
In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, wrote that prior to the recent string of sessions of market weakness, "yields had been pushed to painfully low levels, particularly on the highest quality paper."
"Thus with 10-year Treasury yields bouncing a bit while 30-year yields held steady, the 'belly' of the yield curve finally came under some pressure," Friedlander wrote. "Another factor is probably at work here as well - more investors are beginning to recognize what we have been saying for the last several weeks: the risk of a sharp rebound in inflation, which would put pressure on longer-term muni yields/prices, is very low, and it is probably at least four or five years away, if then. So, they have increasingly begun to find the 10 to 20 year maturity range, where the slope of the muni yield curve is very steep, more attractive."
In economic data released yesterday, personal income rose 0.4% in January, after a 0.2% decline the previous reading. Economists polled by Thomson Reuters had predicted a 0.2% drop.
Personal consumption climbed 0.6% in January, after a 1.0% drop the prior month. Economists polled by Thomson had predicted a 0.4% rise.
The core personal consumption expenditures deflator increased 0.1% in January, after no change the previous month. Economists polled by Thomson had predicted a 0.1% uptick.
Construction spending fell 3.3% in January. The decrease, which was larger than the 1.5% decrease projected by Thomson Reuters, followed a revised December level of $1.020 trillion.
Also, according to the Institute for Supply Management's monthly report on business, the ISM index gained to 35.8 in February from 35.6 in January. Economists polled by Thomson predicted the index would fall to 33.8.
