Munis Mixed as Long End Sees a Bump

The municipal market was mixed Tuesday in light to moderate secondary trading activity as investors returned from a long weekend in observance of Monday’s Martin Luther King Jr. holiday.

“The short end is maybe a bit weaker, but there are some gains out long,” a trader in New York said. “I’d say we’re anywhere from three to five basis points better on the really long end, but we’re probably better a good two or three basis points 20 years and out.”

The Municipal Market Data triple-A 10-year scale was unchanged Tuesday at 3.46%, the 20-year scale fell four basis points to 4.85%, and the scale for 30-year bonds declined six basis points to 5.02%.

“The long end definitely got a bump,” a trader in Los Angeles said. “It could be as much as five basis points lower in yield. High-grades were trading pretty well, but overall trading activity wasn’t terribly active. People were sort of easing their way back after the long weekend.”

Tuesday’s triple-A muni scale in 10 years was at 101.3% of comparable Treasuries and 30-year munis were at 109.0%, according to MMD.

Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 120.4% of the comparable London Interbank Offered Rate.

Treasuries showed some losses Tuesday. The benchmark 10-year note was quoted near the end of the session at 3.35% after opening at 3.33%.

The 30-year bond was quoted near the end of the session at 4.55% after opening at 4.53%.

The two-year note, which was quoted near the end of the session at 0.58%, was unchanged.

Volume will be on the light side again this week, with $3.85 billion coming to market at a time of rising interest rates, poor liquidity, and overall market uncertainty, according to Ipreo LLC and The Bond Buyer.

The anticipated volume is only $83 million shy of last week’s revised $3.02 billion, according to Thomson Reuters. Around $8 billion a week is typical.

Issuers pricing deals this week are likely to face a challenging market in which many retail investors are taking a wait-and-see approach.

The largest deal to test the market is a planned $450 million revenue sale from the New York City Municipal Water Finance Authority.

The deal was priced for retail investors Tuesday, with maturities in 2040 and 2043.

Bonds maturing in 2040 yielded 5.50% with a 5.375% coupon. Bonds maturing in 2043 were not offered during the retail order period.

The sale is scheduled for institutional pricing Wednesday by Jefferies & Co. The credit is rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.

A $200 million sale of hospital revenue bonds from the Philadelphia Hospitals and Higher Education Facilities Authority was moved to the day-to-day calendar Friday due to the market volatility, according to an underwriter at book-runner JPMorgan, which was set to price the deal this week on behalf of the Children’s Hospital of Philadelphia project.

Chicago will top Midwest activity with $288 million of Series 2010C-1 taxable GO bonds Wednesday in a negotiated deal being led by Loop Capital Markets.

The bonds are expected to be rated Aa3 by Moody’s, A-plus by Standard & Poor’s, and AA-minus by Fitch. They mature in a single bullet in 2035.

In the competitive market, Washington has a two-pronged offering Wednesday of various-purpose state GOs totaling $449 million.

The larger piece consists of $358 million of bonds maturing serially from 2012 to 2036. The smaller piece consists of $91 million of taxable debt maturing serially from 2012 to 2020.

The bonds are rated double-A plus by all three major agencies.

In a research note, Tom Kozlik, municipal credit analyst at Janney Capital Markets, wrote that he expects headline risk to “greatly intensify” in 2011.

“While we do not believe there will be 50 to 100 high-profile local government defaults in 2011, as was predicted, we do believe investors can expect headline risk to greatly intensify as politics, political gridlock and policy paralysis takes center stage,” he wrote.

“Suggestions of factors stressing the municipal market were excessively overblown throughout 2010 and we expect exaggerations to worsen in 2011. Concern about municipal-market credit risk will be heavily mixed with headlines of imminent danger stemming from political posturing during state and local government budget negotiations.”

Kozlik also wrote that investors should not buy into artificial intimidation tactics. Instead, he indicated they should be mindful of the effect of the current economic environment on municipal holdings.

“Many involved parties have a vested interest in portraying the current fiscal situation in as dire a light as possible,” he wrote.

In economic data released Tuesday, home builder confidence in the market for new single-family homes fell short of economist expectations in January, holding steady at a level of 16 for a third consecutive month.

Economists expected the National Association of Home Builders’ seasonally adjusted housing market index to rise to 17. Readings over 50 signal more builders view sales conditions as good than poor.

New York manufacturing conditions improved less than economists expected in January as the general business conditions index of the Empire State Manufacturing Survey rose to 11.92 from a December reading of 9.89.

The Federal Reserve Bank of New York released the data Tuesday.

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