Munis Mostly Flat Amid Light Secondary

The municipal market was mostly flat yesterday amid fairly light secondary trading activity.

“It’s a pretty quiet start,” a trader in New York said. “We’re just flat at this point, not really seeing much movement.”

“There might be a little bit of a weaker tone, just carrying over from last week, but I’d say we’re flat for the most part,” a trader in Los Angeles said. “There’s not a ton trading, it’s a pretty quiet start to the week. But I’d say it’s flat with somewhat of a weaker tone.”

The Treasury market showed some losses yesterday. The benchmark 10-year note was quoted near the end of the session with a yield of 3.88% after opening at 3.84%.

The yield on the two-year was quoted near the end of the session at 1.06% after opening at 1.04%. The yield on the 30-year bond was quoted near the end of the session at 4.78% after opening at 4.75%.

The Municipal Market Data triple-A scale yielded 3.06% in 10 years and 3.85% in 20 years yesterday, matching Friday’s levels. The scale yielded 4.17% in 30 years yesterday, also matching Friday.

Friday’s triple-A muni scale in 10 years was at 79.5% of comparable Treasuries and 30-year munis were at 87.5%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 93.7% of the comparable London Interbank Offered Rate.

Volume will decline sharply this week as the market closes the books on the first quarter.

Scheduled new issuance is estimated at $3.04 billion, according to Ipreo LLC and The Bond Buyer, ahead of the upcoming Passover and Easter holiday observances. This compares with last week’s supply bonanza totaling a revised $11.86 billion, which included a pair of multibillion-dollar offerings, according to Thomson Reuters.

A $487.7 million GO public improvement financing from North Carolina will be sold in the competitive market tomorrow.

The deal, which is structured to mature serially from 2011 to 2030, has natural triple-A ratings from Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings.

Meanwhile, Illinois will usher in the start of the second quarter Thursday with a $250 million competitive GO note sale maturing on March 31, 2011.

Though the state applied for short-term ratings from all three major rating agencies, they were not yet available by press time.

The state’s long-term GO bonds are rated A2 by Moody’s, A-plus by Standard & Poor’s, and A by Fitch. That is the second-lowest state GO rating after California as a result of Illinois’ recent downgrades stemming from fiscal shortfalls, including a nearly $12 billion budget gap.

Proceeds from the issue will be used to fund Medicaid services within the state.

In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote: “Munis were substantially weaker last week, with accounts impelled by soft Treasury auctions to realize gains and address near-term risks by moving farther out along the yield curve.”

“Tax-related selling facilitated the upward shift in yields,” Fabian wrote. “By Friday, the tax-exempt curve had flip-flopped — aggressive levels up front had turned concessionary and a formerly buyer-friendly long end appeared aggressively priced for the first time in months.

“Importantly, the sell-off was concentrated in high grades, weakness in which only tightened credit spreads. Thus, this was not an anti-muni or credit-related problem, but more a technical sell-off in sympathy with Treasuries,” Fabian wrote.

“This week, the primary market is the smallest of 2010, giving the economic data poll position. In particular, investors are looking at the Friday employment reading to indicate whether or not things are actually getting much better.”

George Friedlander, municipal strategist at Morgan Stanley Smith Barney, wrote that last week a number of factors “were at work in pushing muni yields higher, particularly in the intermediate range.”

Among them, “shorter intermediate yields simply had become unsustainably low,” he wrote.

“We have discussed this for the past several weeks, noting that there did not appear to be any value in the one- to five-year portion of the muni yield curve,” according to Friedlander. “This pattern, in turn, has resulted from the near-zero yields on cash/near cash, causing investable funds to cascade out into shorter intermediate munis, including through bond funds.”

“Second, over the past several weeks, flows into limited-term and intermediate-term muni funds have slowed significantly on the back of lows into limited-term and intermediate-term municipal bond funds that had been extremely strong, garnering a significant portion of that cash as tax-exempt money market fund yields stayed close to zero,” he wrote.

“Once the dam broke and shorter intermediate yields began moving higher, institutions started selling this range, and dealer inventory got quite heavy, including unsold balances on the recent extremely heavy new-issue calendar.”

In economic data released yesterday, personal income was flat, while personal spending increased 0.3% in February, in line with economists’ estimates and the smallest increase in five months.

Core personal consumption expenditures, which excludes food and energy costs, rose 1.3% for the year ending in February, the smallest year-over-year increase since September. February’s core PCE was unchanged from January.

Personal income grew by less than 0.1% in February following a 0.3% increase in January.

Economists polled by Thomson Reuters expected consumption to increase 0.3% and for incomes to increase 0.1%, according to the median estimate.

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