Munis in Familiar Place, But Optimism Returns

The story in the municipal market Monday was the same one that has been told since spring — one of falling yields, low issuance, and light trading in the secondary.

But given a backdrop of frenzied activity in Washington toward finding a compromise for the debt-ceiling crisis and budget debate, as well as recent dramatic movements in Treasury yields, the story this time struck a positive tone for munis, a California trader said.

“There was not as lot of activity, but the day definitely felt better,” he said. “We’ve had some pretty good bumps, particularly out at the longer end. The lack of upcoming supply is definitely helping, in the sense that there may not much in the near term that can derail us so long as this debt-ceiling compromise does get approved tonight or tomorrow morning.”

A solution to the debt-ceiling and budget crisis may finally be upon us, which would go some ways to calming turbulent financial waters. And yet the bond markets continued to strengthen.

The news from Central Falls, R.I., which filed for Chapter 9 bankruptcy Monday morning, wasn’t enough to pressure munis into any kind of sell-off, much less credits from the state.

In a different time, the Central Falls bankruptcy might have triggered a spate of selling at least of its debt. But alas, traders didn’t see any activity in Central Falls credits.

“People tend to look at these as being somewhat isolated incidences created by specific issues to those entities,” the trader said. “Central Falls was not a surprise — it certainly has been in the headlines for a while. And it’s not a lot of bonds that are affected.”

Muni yields, for the most part, fell throughout the afternoon, according to the Municipal Market Data triple-A curve. Yields were flat to two basis points firmer at the front of the curve. They were three to four basis points lower for maturities from 2019 through 2032. At the long end, yields shaved five to six basis points.

Muni yields plunged across most of the curve Monday. Two-year yields were stuck at a calendar-year low of 0.40%. The 10-year yield pushed four basis points lower to 2.63%. The 30-year yield dropped six basis points to 4.29%

The debt ceiling and budget crisis continues to sustain a massive rally in Treasuries that started at the end of last week. This, in turn, continues to make tax-exempt valuations particularly attractive, by comparison.

After plunging 16 basis points on Friday to its lowest closing yield for 2011, the benchmark Treasury 10-year yield continued its downward course to start the week. At one point at mid-morning, it touched 2.72%. It rose slightly, settling four basis points below Friday’s close, at 2.75%.

The two-year Treasury inched up two basis points to 0.38%. The 30-year yield jumped three basis points in the morning, only to plummet four basis points on the day to close at 4.09%.

The 10-year muni-Treasury ratio, at 97.4%, was at its most favorable level since the last day in January, according to MMD numbers. It was far cheaper against Treasuries than its average for 2011, at roughly 90.3%.

This may not interest the average retail investor, though it probably should. But it did generate some activity among institutions that pay close attention to ratios. “There were some adjustments on some of the overhang from some of the competitive sales from last week,” the California trader said.

It’s also not much of a surprise that new issuance would drop during a summer week laden with uncertainty. The market predicts $3.25 billion in new volume. While this shows that appetite will likely rise above the week’s governmental wrangling, participants have said the crisis could affect the calendar. On its own, issuance is expected to be lower than last week’s revised $4.6 billion.

In the negotiated market, Goldman, Sachs & Co. priced $145.18 million of New York’s Metropolitan Transportation Authority dedicated tax fund refunding bonds in four series. The bonds are rated AA by Standard & Poor’s and AA-minus by Fitch Ratings.

Yields in the first series, $11 million of fixed-rate notes, range from 0.39% with a 5.00% coupon in 2012 to 1.65% with a 5.00% coupon in 2016. Yields had fallen as much as six basis points. Debt maturing in 2011 was offered in a sealed bid.

Credits for the second series, $35 million of floating-rate tender notes, mature in 2028 and offer 40 basis points over the SIFMA rate.

Debt for the third series, $54.47 million of floating-rate tender notes, matures in 2030 and offers 55 basis points over the SIFMA rate.

Credits for the final series, $44.74 million of floating-rate tender notes, mature in 2034 and offer 68 basis points over the SIFMA rate.

Traders are looking forward to the pricing of $900 million expected of negotiated and competitive offerings from the New York City Transitional Finance Authority in two series. “We’re going to have the first day of retail on the TFA Tuesday,” a trader in New Jersey said. “It should prove interesting about where they price them and what kind of retail interest we would see on it.”

But traders and investors — and just about everyone else in the country, if not throughout the world — more eagerly await the end of the debt-ceiling and budget impasse that has sown vast fields of frustration, hesitation, and uncertainty over the past week.

JPMorgan’s fixed-income strategy group, led by Peter DeGroot, noted in a recent report how issuers have cut back in anticipation of the rate volatility caused by the prolonged stalemate over the debt-limit extension and deficit-reduction legislation. Such uncertainty, he wrote, has also encouraged most institutional investors to hold more cash than usual.

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