Munis Stay Quiet, Weaken by One Basis Point

The municipal market was quiet and weaker by about one basis point Tuesday, with many participants out of the office during what is a typically quiet holiday week.

Traders said there were a number of bid-wanted lists floating around the secondary Tuesday from participants looking to close their books for the end of the year, though activity was still somewhat light.

"There's some activity with the bid-wanteds, but it's considerably light overall," a trader in Los Angeles said. "We're seeing some mild losses, just based on what the Treasury is doing and the lack of liquidity, but it's muted. We're probably off one basis point or so."

The Municipal Market Data triple-A 10-year scale increased one basis point Tuesday to 3.16%, the 20-year scale was up one basis point to 4.39%, and the scale for 30-year debt was also elevated one basis point to 4.68%.

Tuesday's triple-A muni scale in 10 years was at 90.8% of comparable Treasuries and 30-year munis were at 103.3%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 109.9% of the comparable London Interbank Offered Rate.

The Treasury market was weaker Tuesday after auctions of five-year notes and four-week bills totaling $60 billion. The benchmark 10-year note finished at 3.47% after opening at 3.32%. The 30-year bond was quoted near the end of the session at 4.52% after opening at 4.41%. The two-year note was quoted near the end of the session at 0.74% after opening at 0.67%.

"The closer we get to the end of the week, the quieter it's going to get," a trader in New York said. "Though given the blizzard over here, it's hard to imagine the rest of the week being much quieter than yesterday. In any case, you have some bid-wanted out there, and not a whole lot of trading happening. The Treasury tanked after the auction, but I didn't see much follow-through to our market. Maybe a basis point if anything."

The Treasury Department auctioned $35 billion of five-year notes, with a 2 1/8% coupon, a 2.149% high yield, and a price of 99.89. The auction was considered weak since dealers took 58% of the notes, as opposed to 6.2% for direct bidders and 35.6% for indirect bidders. The bid-to-cover ratio was 2.61. The Federal Reserve banks bought $1.75 billion for their own account in exchange for maturing securities.

The Treasury Department also auctioned $25 billion of four-week bills at a 0.065% high yield, a price of 99.99. The coupon equivalent was 0.066%. The bid-to-cover ratio was 4.75. The Fed banks bought $6.29 billion for their own account in exchange for maturing securities.

In the daily MMD commentary, Randy Smolik wrote: "Buy and hold strategies are thrown in doubt as Treasury yields trend higher and muni bond funds continue to see hefty outflows."

"The holidays continue to keep muni staff thin, causing bidders to error on the side of caution and cheapen their bids," Smolik wrote. "With limited customer buying, many dealers either pulled or marked their offerings substantially, waiting for the municipal market to regain liquidity. This could mean waiting until the New Year begins."

Trades reported by the Municipal Securities Rulemaking Board were flat to slightly weaker in light trading. Bonds from an interdealer trade of Bay Area Toll Authority 5s of 2034 yielded 5.26%, even with where they were sold Monday. A dealer sold to a customer New Jersey Turnpike Authority 5s of 2036 at 5.15%, one basis point higher than where they were sold Monday.

Bonds from an interdealer trade of taxable New York Metropolitan Transportation Authority BAB 6.814s of 2040 yielded 6.72%, three basis points higher than where they were sold Monday. A dealer sold to a customer East Baton Rouge, La., 5.25s of 2034 at 5.17%, even with where they were sold Monday.

In economic data released Tuesday, the consumer confidence index dropped to 52.5 in December from an upwardly revised 54.3 last month. The November index was originally reported as 54.1.

Economists polled by Thomson Reuters predicted the index would be 56.0.

Activity in the new-issue market was light Tuesday. The entire new-issue calendar this week consists of a solitary $525,000 issue from the Carter County, Okla., Independent School District, which was expected to sell Tuesday in the competitive market after press time. The bonds, which are not callable, mature from 2014 to 2016.

The light slate of new issuance follows a $3.4 billion menu last week, according to The Bond Buyer and Ipreo data. Eight billion dollars is about typical.

The light supply marks a respite for municipal participants, who were buffeted by several turbulent weeks in November and December.

An inundation of new supply coupled with a sell-off in Treasuries has led to a return of negative 4.6% for municipals so far in the fourth quarter, according to a Standard & Poor's index tracking the sector.

Municipalities have sold $130.39 billion of debt so far in the final three months of 2010, according to Thomson Reuters — the second-heaviest quarterly issuance in muni bond history.

Heavier issuance was recorded in the second quarter of 2008, when municipalities refunded out of failed auction-rate securities and sold variable-rate demand obligations in droves.

Thursday is the final day of trading in the current quarter.

Most market watchers expect light issuance to continue into the beginning of 2011, as it is typical for municipal issuers to ease back on debt sales early in the year.

Municipal bond sales in the first quarter have averaged $52.7 billion since the early 1980s, according to Thomson Reuters. That compares with an average of about $67 billion for second quarters, $57 billion for third quarters, and $68 billion for fourth quarters.

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