Munis Stay Quiet and Light as Debt Crisis Looms

Politicians in Washington have yet to make any discernible progress on raising the debt ceiling as the deadline approaches. In response to their ongoing negotiations, the municipal market seemed to hold its breath.

Consequently, few new deals or bid-wanteds brought any excitement to the primary or secondary markets on the day.

“It was a quiet day, very light,” said a New York trader.

Muni yields were steady across roughly the front half of the curve Monday, according to the Municipal Market Data scale. Bonds maturing after 2033 were one basis point higher.

The benchmark 10-year tax-exempt yield remained unchanged Monday at 2.68% for a third consecutive trading session. The two-year yield held once again at its low for the year, 0.40%, for a 10th straight session. The 30-year yield rose one basis point on the day to 4.35%.

Treasury yields started off the week higher across the curve. The 10-year yield rose four basis points to 3.01%.

The 30-year yield rose six basis points to 4.32%. The two-year yield jumped three basis points in the afternoon to 0.43%.

There continued to be gridlock over the debt ceiling and budget debate, but most believed that politicians will reach some compromise by Aug. 2, according to MMD analyst Randy Smolik, which led the bond markets to “mostly chop sideways, waiting for budget events to unfold.”

“Munis had one of the quietest sessions in memory,” Smolik wrote in his daily commentary.

This week’s volume estimate shows a decrease in new issuance. About $4.1 billion in new deals is expected, after $8.3 billion came to market last week, the largest volume for new debt offerings in 2011.

In the negotiated market, Morgan Keegan & Co. priced $124.7 million of unlimited-tax bonds for the Hurst-Euless-Bedford Independent School District in Texas. The bonds are rated AAA and AA-plus by Standard & Poor’s and Fitch Ratings, respectively. Yields range from 0.239% with a 3.00% coupon in 2012 to 4.50% with a 5.00% coupon in 2036.

M&T Securities Inc. priced for retail $100 million of Maryland general obligation bonds for state and local facilities. The bonds were rated triple-A by the major rating agencies.

Yields range from 0.63% with coupons of 2.00%, 3.00% and 4.00% in a split maturity in 2014 to 3.30% with coupons of 3.25% and 4.00% in a split maturity in 2025.

The Maryland issues this week — which will also include Wednesday’s expected $600 million of GO bonds in four separate pricings — have investors’ attention. They want to know how they’ll price, given the fact that last week Moody’s Investors Service placed Maryland and four other triple-A rated states on review for a possible downgrade.

In response, Treasurer Nancy Kopp decided to compress the retail part of the negotiated deal that had been slated to take place on Friday and Monday and do it all Monday to give Washington time to make progress on a solution to the debt ceiling.

The deal has sold about $70 million so far, according to Kopp. It was not as strong a retail period as the issuers would have liked and as it often has been previously, she added.

“But, considering it’s Monday, and 100 degrees here, we have a dysfunctional federal government, and all the confusion about ratings, we think actually it’s done quite well and is a good lead-in to the competitive sale on Wednesday,” Kopp said.

The retail period is designed for Maryland buyers, Kopp said. It lets Maryland buyers get a direct piece of the issue without having to go through a fund.

“We’ve always done it separately,” she said. “We’ll see what happens Wednesday.”

The debt ceiling crisis has the industry’s full attention but not its complete concern. Most market participants who have been following the story believe that a deal will be reached in time, according to a New Jersey trader.

“I see its effect on the Treasury market here,” he said. “They’re going to take it right to the end, whether it’s an extension before they get a more permanent package together. I don’t think anyone thinks the U.S. is going to default. The people in Washington are going to play their games, and by playing games, they’re going to bring it down to the last second. Most professionals and investors out there who are paying some attention realize it’s Washington playing its games, and that they’ll get something done in the last possible second.”

As far as its effect on the municipal market, the trader said he’s not necessarily seeing it. If anything, when Treasuries get hit, the secondary might get a little quieter than usual, he added. But he doesn’t see the pressure on the market participants out there to start hitting any bids.

“The pressure doesn’t exist right now,” he said. “We have some market insulation, just due to the fact that our main issue this year has been a lack of supply.”

Regardless of the as yet undecided fates of the U.S. debt ceiling and budget, the muni market continues to get votes of support. One of the latest hails from Citi’s George Friedlander in a recent research report.

“Buying by direct retail investors remains solid in three ways,” he wrote. “First, the net buys of odd-lots from the [Municipal Securities Rulemaking Board] daily feed has declined modestly from recent peaks but remains extremely solid.”

Second, he still sees a willingness to do extension swaps out of the least-attractive one- to five-year range into longer, higher-yielding maturities. Finally, bona fide individual orders taken during the retail order periods for last week’s hefty new-issue calendar saw very solid demand on almost every deal, Friedlander wrote.

“Clearly, had direct retail not been active over the past week, the $8.3 billion or so of new issues would have caused a substantial upward adjustment in yields, but that was not the case,” he wrote. “And all of this happened in the midst of the twin crises over Greece and the European Union and the still-extant crisis over the need to raise the debt ceiling.”

In another vote of confidence for the market, Friedlander noted that two related factors stand out. Yields on paper out to at least five-year maturity are extremely unattractive. In addition, there remains an enormous amount of cash in the hands of individual investors.

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