Munis Soften, Following Treasuries and Stocks

A bored municipal market, wholly lacking in enthusiasm and direction from a pathetic day of primary issuance, decided it had some yield to give.

With seemingly little gusto for a rally or slump, muni yields took their cues from Treasuries and equities, a trader in New York said. Secondary activity was also mostly modest on the day.

The softening "was almost all a reflection of Treasuries and the stock market, and the continued low new issuance volume," he said.

Tax-exempt yields saw a moderate increase across much of the curve Tuesday, according to the Municipal Market Data scale. Yields for maturities after 2016 were one to four basis points higher. Still, muni yields remained close to historic lows.

Muni yields mostly rose across the curve Tuesday. The 10-year muni yield backed four basis points up from the lowest closing level ever recorded by MMD to 2.19%.

The 30-year muni yield skipped up two basis points to 3.82%. The two-year yield remained at 0.30%, its lowest yield in more than 40 years.

Treasury yields ended the day higher across the curve. The benchmark 10-year yield jumped six basis points to 2.15%.

The two-year yield inched up one basis point to 0.22%, four basis points above its all-time low. The 30-year yield vaulted seven basis points to 3.48%.

Municipal ratios to Treasuries, in the face of low nominal yields, still matter, Citi fixed-income analyst wrote George Friedlander in a recent report. Because Treasury yields have plunged recently, muni ratios are extremely high, particularly nearing the front end of the yield curve. And the ratios are important: they give munis an approximate cushion should Treasury yields rise significantly, Friedlander wrote.

Furthermore, the ratios demonstrate a "fundamental" shift in Treasury yields, he added. This implies that economic growth in the near term will be more limited, and yields lower, than previously expected.

"Both the lower current level of yields on shorter intermediates and the high yields as a percentage of Treasury yields are quite supportive of the current level of rates, the recent drop in yields notwithstanding," Friedlander wrote.

He added that Treasury yields in the five-year range, combined with recent Federal Reserve comments on keeping the federal funds rate target low well into 2013, indicate that short-term yields will remain rather low for a long time to come.

"These factors, in our view, make a compelling case for moving out on the muni yield curve, at least beyond the five- to six-year range where yields remain so unattractive," Friedlander wrote. "It is particularly noteworthy that investors in high-grade munis can double their yield simply by moving from the five-year range to the eight-year range, and can roughly triple their yield by moving out to roughly 13 years."

New issuance year-to-date remains well below 2010 levels. The situation will likely not improve this week. Industry estimates predict municipal bond sales of $3.65 billion versus a revised $4.72 billion last week.

Traders expected the day's new issuance to give the market more direction. JPMorgan priced for retail $169.2 million of Rhode Island general obligation bonds in two series. The bonds are rated Aa2 by Moody's Investors Service and AA by Standard & Poor's and Fitch Ratings.

Yields for the first series, $145 million of consolidated capital development loan of 2011, Series A, range from 0.45% with a 2.00% coupon in 2013 to 4.00% priced at par in 2031. Credits maturing in 2012, and from 2024 to 2030, were not offered for retail.

Yields for the second series, $24.2 million of consolidated capital development loan of 2011, refunding Series B, range from 0.45% with a 4.00% coupon in 2013 to 0.82% with a 5.00% in 2015. Credits maturing in 2012 are not offered for retail.

Wells Fargo Securities priced $166.8 million of Houston combined utility system first-lien revenue refunding bonds. The bonds are rated AA by Standard & Poor's and AA-minus by Fitch.

Yields range from 0.56% with a 5.00% coupon in 2013 to 2.62% with a 5.00% coupon in 2021.

Morgan Stanley priced $91.2 million of Alabama Federal Aid Highway Finance Authority grant anticipation refunding bonds. The bonds were rated Aa2 by Moody's and AA by Standard & Poor's.

Yields range from 0.56% with a 4.00% coupon in 2013 to 1.63% with a 4.00% coupon in 2017. Debt maturing in 2012 was not formally reoffered.

There were no substantial new deals on the competitive side Tuesday.

The industry was also talking about the Federal Reserve Tuesday, a trader in New York said. Fed chairman Ben Bernanke is expected to speak to the Federal Reserve Bank of Kansas City conference in Jackson Hole, Wyo., Friday morning on the economy.

There is conjecture that Bernanke will have to print money, the trader added, as part of a new stimulus program. "We're trying to price that in," he said. "The market is trying to price that in. We did that on the Treasury [Monday]. By Thursday, you'll start to see the Treasury market bounce around again as everyone speculates what he's doing."

The equity markets had a strong session, with the major indexes all up by at least 2.97%. The Dow Jones Industrial Average gained 322 points on the day.

In other economic news, the Commerce Department reported Tuesday that sales of new single-family houses in July 2011 were at a seasonally adjusted annual rate of 298,000.

The number stands 0.7% below the revised June rate of 300,000, but 6.8% above the July 2010 level of 279,000. It represents the fourth consecutive monthly decline in new home sales.

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