The municipal market is expected to catch its collective breath this week as new volume tapers off by about $2.5 billion from the $7.25 billion that smothered the market last week, sparking a sell-off that sent benchmark yields to 15-month highs and caused the cancellation of a handful of deals, according to Ipreo LLC and The Bond Buyer.
New volume will recede to an estimated $4.39 billion, which is barely half of the $8.08 billion average for the 46 weeks so far this year, according to Thomson Reuters. Recent weekly volume has ranged from $12.91 billion during the week of Oct. 4 to $7.25 billion last week, according to the data. But a string of several consecutive heavy weeks had undermined demand.
Municipal players expect this week’s deals to find buyers despite the recent volatility and the Thanksgiving holiday due to historically favorable yields.
“The market has made a major adjustment and it’s still trying to live with that,” a New York underwriter at a large institutional firm said Friday. “It has bounced backed a little and has a better tone than it did earlier in the week.”
He predicted strong demand for upcoming deals.
Market participants are still tightening their chinstraps after watching the long end give up nearly 70 basis points at the start of last week, before rebounding Thursday amid a barrage of short-term issuance.
“It’s not like the storm has passed,” the underwriter said. “People are aware of the heavy issuance expected through the end of the year.”
One reason for the present market volatility is the uncertain future of the Build America Bond program, which expires Dec. 31. Federal lawmakers have debated the virtues of the taxable bonds and their 35% federal subsidy, with some calling for a lower subsidy and others calling for outright termination of BABs.
Another reason is the deluge of debt from California, which passed its budget 100 days late on Oct. 8 — delaying the state’s issuance plans.
Amid sharply rising municipal yields prompted by the overall weakness and heavy supply, California officials Wednesday scaled back this week’s largest deal, a various-purpose general obligation sale, to $1 billion from $1.75 billion.
They moved the $750 million cut from that deal to the state’s $3.025 billion BAB issue, which was increased twice last week. Pricing for the BABs was delayed from Thursday to Friday, pending the state’s disclosure of a lawsuit.
The deal is one of the largest this week to test the municipal waters. It will be priced Tuesday by lead manager RBC Capital Markets after a two-day retail order period that began last Friday. The bonds are rated A1 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch Ratings.
The Los Angeles Department of Water and Power will add to the California activity with a $760 million sale of system revenue bonds structured as Series 2010 BABs. The deal, scheduled for pricing Monday by lead manager Goldman, Sachs & Co., is rated Aa3 by Moody’s, and AA-minus by Standard & Poor’s and Fitch.
Traders last week agreed that the market was beginning to stabilize, reporting tax-exempt yields six to 10 basis points lower out 20 years and longer. Bonds with earlier maturities were unchanged.
The 30-year triple-A scale tracked by Municipal Market Data whipsawed down 12 basis points to 4.50% Thursday from a 15-month high of 4.62% Wednesday and 3.93% as recently as Nov. 5. The benchmark yield recovered an additional 10 basis points when it ended at 4.40% at the close of trading Friday, according to MMD.
Earlier in the week, some traders reported losses of up to 20 basis points on the intermediate and long end as the market faced a lack of support from the Street due to price uncertainty in the deluge of new deals.
Last week’s volatility was marked by pressure in the secondary market and an abundance of supply that worked in combination to move prices lower and resulted in 30-year yields soaring to 15-month highs. The 30-year triple-A scale increased 70 basis points from Nov. 8 through Wednesday to a 15-month high of 4.62%, which marked its highest level since August 2009 and a one-day surge of 20 basis points from Tuesday, according to MMD.
The weakness pushed the yield of tax-exempt securities to over 100% of comparable Treasuries.
Besides a hefty calendar of long-term supply led by Friday’s $3.275 billion of taxable California bonds, the market also waded through the arrival of $10 billion of California revenue anticipation notes. The RAN sale is the largest note deal ever for the municipal market, breaking the previous mark set in October 2002 when the same state sold $9 billion of Rans, according to Thomson.
Priced by JPMorgan, notes from last week’s $2.25 billion Series A-1 mature in May 2011, yielding 1.50% with a 3% coupon, while the $7.75 billion Ran Series A-2 matures in June 2011, yielding 1.75% also with a 3% coupon.
The notes were originally scheduled to sell Wednesday. Pricing was delayed a day so California could disclose a lawsuit filed Tuesday that challenges a plan to sell 24 state buildings at 11 sites and lease them back from a private-entity owner, according to the state Treasurer’s Office.
The disclosure delay also prompted California to push back the arrival of the $3.025 billion BAB issuance to last Friday. Given the state of the markets, officials said it made fiscal sense to sell more BABs last week, and fewer tax-exempt GO bonds this week.
The California deals were among several affected by last week’s sell-off, including refundings and other BAB deals that were canceled altogether pending market conditions.
This week’s other market activity include Ohio’s planned sale of $300 million of higher education taxable GO BABs in a negotiated deal slated to be priced by Barclays Capital. Rated Aa2 by Moody’s, and AA-plus by Standard & Poor’s and Fitch, the bonds are structured to mature serially from 2012 to 2030.
Colorado’s Regional Transportation District is gearing up to bring $201.9 million of tax-exempt certificates of participation to market Monday in a negotiated deal led by Morgan Stanley.
The bonds are rated Aa3 by Moody’s. The structure was not available at press time.
