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Market Post: Muni Investors Quietly Wait for California Deal

AUG 16, 2011 10:53am ET
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NEW YORK — The municipal market has been slow to give direction Tuesday morning. That could change later in the day if there is ample retail interest in the  $980 million of California Department of Water Resources power supply revenue bonds.

But for now, there has been some interest on the short end of the yield curve. Some large institutional money managers also have a few bid-wanted lists in the market. But it’s too early to say if it’s having an effect, a trader in New York said.

“There is a fair amount of bid-wanteds out there; we’ll see if that does anything to the market,” he said. “It’s had no effect yet; yields are relatively the same. You don’t get much out there when you go to buy something.”

Tax-exempt yields are mixed throughout the curve on the morning, according to the Municipal Market Data scale. Yields for debt maturing from 2013 to 2017, from 2023 to 2027, and after 2034 are steady. Maturities in 2018 to 2022 are flat to one basis point lower. And those maturing in 2028 to 2034 are flat to one basis point higher.

Munis started this week much as they ended last week: unchanged. The 10-year muni yield held steady at 2.26%, for a fourth straight session, its lowest yield since Sept. 3.

The two-year muni yield stayed at 0.30%, its lowest yield in more than two years. And the 30-year muni yield was steady at 3.88%, still its lowest level since Nov. 2.

Treasury yields mostly firmed to start the day. The benchmark 10-year Treasury yield fell two basis points to 2.28%. The 30-year yield dropped three basis points to 3.74%. The two-year yield held steady at 0.20%, two basis points above its all-time low.

More new issuance is expected this week. New deal volume should rise to around $5.28 billion, according to industry estimates. That an increase from the meager $2.25 billion of municipal bond sales seen last week.

The industry is focusing on two new deals Morgan Stanley is expected to price this week, both negotiated bids. These include more than $1 billion of Indiana Finance Authority wastewater utility revenue bonds. The bonds should be priced for retail on Wednesday, and for institutions the following day.

The firm is also slated to price the California Department of Water Resources bonds. Retail investors are expected to participate on Tuesday with institutional investors following on Wednesday.

Economic news on the day was mixed. The Commerce Department reported Tuesday that housing starts fell 1.5% to a seasonally adjusted annual rate of 604,000 units in July.

This was the first decrease in three months. Building permits also fell 3.2% to a seasonally adjusted annual rate of 597,000 units.

To make matters worse, starts and permits for June were both revised lower. Economists anticipated a stronger July for housing starts and building permits, predicting 600,000 starts and 606,000 permits for the month, according to the median estimate from Thomson Reuters.

On the up side, the Federal Reserve reported Tuesday that industrial production increased 0.9% in July. It represented the largest gain in seven months, led by an increase in production in the utilities sector.

Capacity utilization also climbed to 77.5% in July, rising from the upwardly revised 76.9% in June. It’s the highest level since August 2008.

Economists anticipated an increase of 0.4% for production and 76.9% for capacity utilization, according to the median estimate from Thomson Reuters.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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