The municipal market was unchanged to slightly firmer Monday amid fairly light secondary trading activity.
"It's fairly quiet," a trader in New York said. "The primary has a couple deals that people might be paying some attention to, but it's literally a couple, and that's later in the week. The further we go this week, the quieter it's going to get.
The trader said yields fell by a basis point or two and the tone of the market was firmer, but activity was muted.
The Municipal Market Data triple-A 10-year scale declined one basis point Monday to 3.17%, the 20-year scale fell one basis point to 4.39%, and the scale for 30-year debt was unchanged at 4.66%.
"There's not a ton trading," a trader in Los Angeles said. "You can maybe pick up a basis point or two in spots, but it's been pretty quiet. Overall, I'd say we're flat with a hint of firmness."
Monday's triple-A muni scale in 10 years was at 94.9% of comparable Treasuries and 30-year munis were at 105.0%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 112.3% of the comparable London Interbank Offered Rate.
The Treasury market showed little movement Monday. The benchmark 10-year note was quoted near the end of the session at 3.33% after opening at 3.33%. The 30-year bond was quoted near the end of the session at 4.44% after opening at 4.43%. The two-year note was quoted near the end of the session at 0.61% after also opening at 0.61%.
The flood of new supply that has inundated the municipal bond market the past month is expected to die out this week as holiday-bound issuers take a breather from selling new debt.
State and local governments are slated to sell just $709.3 million this week, according to data from The Bond Buyer and Ipreo, and could see as much $2 billion. The lull in the storm is a welcome reprieve for a market that absorbed a tidal wave of $11.16 billion last week. Eight billion is typical.
Heavy supply has been one of the primary factors cited in the thrashing of municipal bonds the past two months. During that time the yield on the benchmark triple-A rated 10-year municipal bond has spiked nearly 90 basis points.
According to Bloomberg LP, the market has digested $54.1 billion in new supply the past five weeks and $107 billion in the past 10.
The biggest deal of the coming week by far is a $1.31 billion negotiated offering from the New York Liberty Development Corp., underwritten by Goldman, Sachs & Co. Because the sale date has not been established yet, it is not included in the estimate for total weekly issuance.
The money will be lent to Larry Silverstein to partially finance construction of 3 World Trade Center, a planned 62-story office building that will bring 2.1 million square feet of office space to the World Trade Center site in lower Manhattan. The loan will be repaid with money collected from renting out the office space.
Repayment of the debt is guaranteed by the Port Authority of New York and New Jersey, which owns the land the building is being constructed on.
The bonds are rated AA-minus by Standard & Poor's, mainly reflecting the Port Authority backing.
Also in the negotiated market, the Utah State Board of Regents is floating a $389.5 million student loan revenue deal underwritten by RBC Capital Markets.
The issuer expects the bonds to be rated triple-A by Standard & Poor's and Moody's Investors Service.
Activity in the new-issue market Monday was light.
George Friedlander, senior municipal securities strategist at Citi, wrote in his weekly report that yields in the tax-exempt market have ratcheted up sharply for a variety of reasons. He said they include a rush to market before the Build America Bond program sunsets, higher Treasury yields, an extremely clogged December calendar, and severe outflows from tax-exempt bond funds.
"The demise of Build America Bonds, if it turns out to be permanent, would radically alter the yield structure and functioning of the tax-exempt market," Friedlander wrote. "Nevertheless, we believe that the dramatic increase in yield levels, and a sharp steepening of the muni yield curve, more than fully discounts these changes. We expect a strong 'January effect' to pull yields lower early next year."
Citi is focusing on longer intermediate maturities, according to Friedlander, and investors who are seeking higher yields and willing to take some market risk. He also noted that the BAB program could be resurrected, which would lead to an additional rally if attempts to reopen the program prove to be successful."
"We continue to stress difficulties in selling bonds on the bid side through year-end in order to make portfolio changes," Friedlander wrote. "For now, we would only sell the shortest, most liquid paper for this purpose, while focusing on putting available cash, if any, to work. We expect the bid side to firm up substantially in January."
Despite the challenges facing the market, Friedlander anticipates a dramatic "January effect" in 2011 to put downward pressure on long-term yields.
John Dillon, municipal bond strategist at Morgan Stanley Smith Barney, is predicting that the true test for the market will begin in mid-January. That's when a more robust new-issue calendar, likely to be more than 90% tax-exempt, enters the marketplace, he wrote in a market commentary.
"It remains to be seen how well the longer-end of the tax exempt market reacts to the renewed supply," Dillon wrote. "Only time will tell. Issuance may indeed be slow at the start of the year, but buyers of the long end may be cautious until longer-term evidence of discipline on the issuer front surfaces." Either way, he said, it is clear that this is currently a buyer's market.
"Accordingly, we do not advocate selling at this juncture," he wrote. "For those with the wherewithal to make a purchase in the current market, we believe value continues to reside in our core 6-to-14 year maturity range, as well as our 'opportunistic' extension out to 20 years."
In economic data released Monday, the Federal Reserve Bank of Chicago's national activity index for November declined to negative 0.46 from a reading of negative 0.25 reading in October. The index is a weighted average of 85 indicators of national economic activity, and is constructed to have an average value of zero and a standard deviation of one.
