The municipal market was largely unchanged yesterday in light activity, ahead of a slate of new issuance in the primary market coming today and tomorrow.
Traders said yields in the secondary market were flat.
"There wasn't much to speak of today," a trader in Los Angeles said. "It was pretty flat, pretty unchanged. I didn't see a lot of activity out there, not much trading. Just a pretty quiet Monday, really."
"We have a good deal of supply coming this week, and it's a short week, so we'll see how we digest it over the next couple sessions," a trader in New York said. "But for today, there wasn't much going on, and I'd say we were just totally flat."
A slate of new offerings - anchored by a pair of deals from New York and California issuers - is expected in the municipal market this week. While the total is considerable, the size of the deals will be in stark contrast to the multibillion dollar issues the market digested over the past two weeks.
Issuers will bring an estimated $4.67 billion of competitive and negotiated deals, as compared to last week when a revised $4.34 billion came to market, according to Thomson Reuters.
In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, wrote that he expects "the muni market to largely remain in a trading range, with heavy issuance and potentially misplaced inflationary fears keeping the slope of the yield curve steep."
"Pulling in the opposite direction is the vast appetite among individual investors for relatively low-risk sources of income, still vast amounts of cash in retail investor hands, and the steep slope of the yield curve," he wrote. "Within that trading range, we would continue to focus on sectors, maturities, and states that are experiencing indigestion as a result of a heavy new-issue calendar."
The Treasury market showed mild losses yesterday. The yield on the benchmark 10-year note, which opened at 2.88%, was quoted near the end of the session at 2.94%. The yield on the two-year note was quoted near the end of the session at 0.96% after opening at 0.95%. The yield on the 30-year bond, which opened at 3.69%, was quoted near the end of the session at 3.73%.
As of Friday's close, the triple-A muni scale in 10 years was at 110.4% of comparable Treasuries, according to Municipal Market Data. Additionally, 30-year munis were 128.9% of comparable Treasuries. Also, as of the close Friday, 30-year tax-exempt triple-A rated general obligation bonds were at 140.7% of the comparable London Interbank Offered Rate.
Philip Fischer, municipal strategist at Bank of America-Merrill Lynch, wrote in a weekly report that "the lack of active arbitrage in the muni market continues to make hedging difficult, as movements in taxable markets do not correlate well with munis. In absolute terms, however, the volatility of yields and the yield curve have declined in recent weeks for both cash and derivative markets."
New York City will be the largest deal priced this week when it sells $583 million of general obligation bonds in a deal being senior-managed by Morgan Stanley and co-managed by Citi, JPMorgan, and Merrill, Lynch & Co.
The city on Friday increased the size of the size of its fixed-rate, new-money bonds by $100 million during the first of a two-day retail order period that began on Friday ahead of today's official institutional pricing, according to the Office of Management and Budget.
The city's deal also includes $33 million of taxable fixed-rate, new-money bonds, and a $50 million offer of outstanding tax-exempt bonds that are being remarketed and converted from variable to fixed rate.
Officials decided to increase the size of the tax-exempt, fixed-rate bonds in the face of an improving market for new issuance. In the retail order period, the city set a top retail yield of 5.50% for the 2031 maturity. In 2019, the bonds yield 4.52%.
Proceeds of the new-money bonds, which are expected to mature from to 2011 to 2037, will be used to finance the city's ongoing capital improvement program. New York City is rated Aa3 by Moody's Investors Service, AA by Standard & Poor's, and AA-minus by Fitch Ratings.
The California State Public Works Board, meanwhile, is planning to sell $434.4 million of lease revenue bonds tomorrow in a deal being senior-managed by Ramirez & Co. after a retail order period that ends today. Structured as serial bonds maturing between 2010 and 2029, the bonds are rated A3 by Moody's, and A-minus by Standard & Poor's and Fitch.
The deal consists of $181.6 million of debt for the state's Department of General Services, $107.8 million of debt for the Department of Education, $90.5 million of proceeds for the Department of Developmental Services, and $54.4 million for the Trustees of the California State University.
"This week," wrote Matt Fabian, managing director at Municipal Market Advisors, in a weekly report, "there is an early close on Thursday and no trading on Friday, but participants will digest a $5 billion new-issue calendar."
"The Treasury market features large auctions as well amid likely difficult monthly budget and trade releases," he added. "Thus the market may struggle to maintain the positive momentum from last week, putting pressure on underwriters to retain buyer-friendly pricing on new issues."
In the new-issue market yesterday, JPMorgan priced for retail investors $95 million of certificates of participation for Kern County, Calif., which mature from 2011 through 2029, with a term maturity in 2035. Yields range from 2.10% with a 3% coupon in 2011 to 5.70% with a 5.5% coupon in 2029. The 2035 maturity was not offered during the retail order period. The COPs are callable at par in 2019 and are insured by Assured Guaranty Corp. The underlying credit is rated A3 by Moody's and A-plus by Standard & Poor's.
The economic calendar was light yesterday.
