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Thursday's Market

Bankruptcy News Boosts JeffCo Activity in Secondary

Secondary trading activity of Jefferson County, Ala., debt showed a significant uptick Thursday after the troubled county filed for bankruptcy late Wednesday.

Trades reported by the Municipal Securities Rulemaking Board showed blocks of over $1 million trading Thursday morning, a spike from just days before when fewer, smaller blocks were trading — denominations of around $10,000 to $20,000.

"There might well be some savvy risk taker who says this is a good time and a good opportunity to add to a new or existing position," said Jim Colby, senior municipal strategist for Van Eck Global. "When there is bad news in the market, there are bonds in weak hands that can be acquired at a good price if investors are willing to wait for the process to play out."

"The recovery of principal — if not some interest — in the muni market often is at a very high rate comparatively speaking, so whoever is acquiring those bonds probably had that in mind."

Jefferson County sewer revenue 5s of 2041 traded 10 times in two hours in Thursday afternoon trading, and three of those trades were over $1 million. Before that, no trade topped $200,000, and most trades were in the $15,000 to $20,000 range.

Another CUSIP of Jefferson County sewer revenue 5s of 2041 traded 10 times Thursday afternoon, after only trading four times a day in the weeks before. In weeks ahead of the filing, trades were in blocks of no more than $20,000. On Thursday, trades reached blocks of up to $115,000.

Jefferson County sewer revenue 4.75s of 2038 traded 10 times Thursday, with two of those trades in blocks of over $1 million. Before the bankruptcy filing, the bonds had traded no more than four times a day in blocks topping no more than $35,000.

Jefferson County sewer revenue 5.125s of 2042 traded four times Thursday afternoon and three of those trades were in blocks over $1 million. That CUSIP traded with a high of $60,000 previously with an average of two trades per day.

Chris Shayne, senior market strategist at BondDesk Group, analyzed Jefferson County trades in the retail secondary market and said up until yesterday's close, bonds were thinly traded.

"Since May 2010 volume has dropped for Jefferson County," Shayne said. "Prior to May 2010 and in late 2009, the bonds were pretty active and there was a consistently higher volume of trades per day. It appears that starting around mid 2010, investors become wary of what was happening in Jefferson County and volumes started to decrease around that time."

Most analysts don't expect the bankruptcy to have a ripple effect on the markets. Alan Schankel, managing director at Janney Capital Markets, noted in a research paper that "although this is certainly a headline event, the filing did not catch the market by surprise since the situation has been brewing for years."

Others agree. "We continue to view this as an isolated instance and although we have concerns about the stress of some municipal credits we do not think that there are many credits that will follow their lead," said Municipal Market Data analyst Daniel Berger.

However, Shayne noted that while there was no "national spillover," there does appear to have been a contagion effect on Alabama bonds generally.

When comparing national median yields versus Alabama median yields, data shows Alabama yields are trading higher. In the past three months, Alabama munis traded about 60 basis points higher than the national median yields.

"Jefferson County seems to have contaminated the whole state," he said. "If you're buying and selling munis in Alabama, you're receiving more yield because there's a perception that the whole state is risky."

Shayne noted that on Wednesday, Alabama yields closed a full point above the national median.

"The data suggests that this event didn't rock the national market or have anything approaching the impact that comments like Meredith Whitney's [predictions of widespread defaults] had on the market," he said, "But it does seem that bond traders are close enough to the action that they have assigned greater risk to the whole state."

Outside Jefferson County, the rest of the muni market took a break for the long weekend early.

"It's very quiet today," a trader in New Jersey said. "There was a fair amount of bids wanted and now it's very quiet. We are getting ready for the long weekend."

Muni yields were steady along most of the curve with up to a three basis points increase from the belly of the curve on out, according to the MMD scale.

On Thursday, the two-year munis closed at 0.42% for its eighth consecutive trading session. The 10-year muni yield finished up two basis points to 2.25%, and the 30-year muni yield closed up three basis points to 3.73%.

Treasuries spent the day falling, erasing all of Wednesday's gains. The 10-year yield was back up above 2%, trading up nine basis points to 2.06%. The 30-year was up eight basis points since Wednesday's close at 3.11%. The two-year was flat at 0.24%.

The primary market was extremely light Thursday, but the secondary market was a little more active.

"Munis are starting to show signs of pressure after early professional trading at steady levels," wrote MMD analyst Domenic Vonella. "Customer follow-through is light, not surprising for the day before a holiday, but this is leading to some concession in the high-grade and quality spreads as well as dealers looking to shed some exposure ahead of next week's massive calendar."

Other trades reported by the MSRB Thursday showed losses. Bonds from an interdealer trade of Massachusetts School Building Authority 5s of 2030 yielded 3.21%, 14 basis points higher than where they traded Wednesday.

A dealer sold to a customer Chicago Transit Authority 5.25s of 2036 at 4.75%, five basis points higher than where they traded Wednesday.

A dealer bought from a customer Philadelphia water and wastewater revenue 5s of 2036 at 4.59%, five basis points higher than where they traded Wednesday.

Bonds from an interdealer trade of Bulloch County, Ga., Development Authority 5s of 2026 yielded 4.15%, two basis points higher than where they traded Wednesday.

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