Traders Urge a Fix for Debt-Ceiling Crisis

Get it done!

That’s the resounding message municipal bond traders have for Capitol Hill and the White House regarding the rapidly approaching debt-ceiling crisis.

They want the two parties to reach a solution quickly — not because of the issue’s implications for those munis with ties to U.S. debt, but because the standoff creates uncertainty. And uncertainty has a nasty habit of stifling the market.

The markets are more concerned about more quantitative easing, traders said, as opposed to whether the debt ceiling gets resolved in time. And industry watchers are expecting higher levels of volatility in the fixed-income world these days, a trader in California said.

“The longer this goes on, the more negative Treasuries will become,” he said. “And then all fixed income is going to follow. We saw that in the corporate world, where the issuance has just stopped because of the huge volatility and the uncertainty.”

Moody’s Investors Service, giving lawmakers and President Obama a push, placed the U.S. government on review for possible downgrade from its historically ironclad triple-A rating Wednesday. In doing so, it also placed the ratings of all directly linked ratings on review.

These actions affect more than 7,000 ratings — sale, debt, or maturity level — with about $130 billion of original par amount across different types of credits, Moody’s wrote.

They include pre-refunded munis and other bonds that are secured by escrows funded with U.S. Treasuries or government agency obligations, and bonds backed by letters of credit issued by the Federal Home Loan Bank, among others.

Standard & Poor’s reportedly has also warned lawmakers that the debt ceiling needs to be raised so no payments are delayed.

But traders said the Moody’s comment mentioned consequences that are already common knowledge to the industry. They have fielded queries their customers raised about the report, as well as the possible effects a downgrade on U.S. debt would have on the muni market.

“We’ve had customers ask about it,” another trader in California said. “Maybe the ratings agencies feel they need to get out in front of it. Obviously, if you’re potentially going to downgrade U.S. government debt, then it would translate to downstream municipal bond credits suffering the same fate. If you’ve got pre-refunded bonds that are collateralized with U.S. Treasuries that are triple-A municipals right now, and that collateral gets downgraded, you’re going to see that domino fall.”

Traders also largely ignored the second session of Federal Reserve Board chairman Ben Bernanke’s testimony on Capitol Hill.

He was grilled by the Senate Banking, Housing and Urban Affairs Committee after presenting the same testimony he offered the House Financial Services Committee Wednesday: that the Fed will act, if necessary, to either tighten or loosen monetary policy.

But while the muni market hasn’t been reacting to the debt ceiling issue, it hasn’t been doing much of anything, traders said, with limited new issuance and moderate activity in the secondary.

Muni yields held steady across the curve Thursday, according to the Municipal Market Data scale.

The benchmark 10-year muni yield was flat Thursday at 2.66% for a third consecutive session. It rests 32 basis points beneath its average for 2011.

The 30-year yield also remained unchanged for a third day at 4.30%, or 32 basis points under its average for the year.

The two-year yield, too, hovered at 0.40% for a third consecutive day after 20 straight sessions at 0.42%, and another 17 at 0.44%. It stands at its nadir for the year and 20 basis points below its average for 2011.

The muni market was quiet Thursday, after a strong week. One positive recent development, according to the first California trader: retail has picked up. Individual investors are leaving mutual funds, but they’re buying bonds individually, he said.

“We see that in the bonds that are 10-year final maturities with five-year calls,” the trader said. “Two weeks ago, the market wasn’t paying anything to the call to get that kick to maturity. All of a sudden, they’re trading aggressively to call. And that tells me retail is starting to come back.”

Treasury yields rose Thursday. The 10-year yield increased eight basis points to 2.96%.

The 30-year jumped nine basis points to 4.26%. The two-year yield stepped up two basis points to 0.38%.

This week’s issuance, an increase over last week’s holiday-shortened volume, has been well-received.

By Thursday, the largest new deals had reached the market.

There was some good news on the ­employment front. The Labor Department reported Thursday that initial jobless claims in the week ending July 9 fell 22,000 to 405,000 on a seasonally adjusted basis.

That marks the lowest level of initial claims since mid-April. Also, continuing claims for the week ending July 2 climbed to 3.727 million.

Economists anticipated 415,000 initial jobless claims and 3.67 million continuing claims, according to the median estimate from Thomson Reuters.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER