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Market Post: Munis Continue to Seep Lower

FEB 9, 2012 1:40pm ET
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NEW YORK – The tax-exempt market continued to weaken Thursday afternoon as limited supply provided no direction. While activity was up from previous days this week, munis followed Treasuries lower on good news from Greece and better-than-expected unemployment claims.

“I think we’re weaker again today,” a Philadelphia trader said. “We’ve been weaker all week.”

He added that the Municipal Market Data scale has been cut one to three basis points today after earlier cuts this week, and the scale has still not been cut enough. “I still think they are behind. There is not a lot of supply to price the market this week and deals that have been out there are slow.”

Goldman, Sachs & Co. priced $276.5 million of Shelby County, Tenn., bonds earlier this week that “was hung up a little,” the trader said. “First Southwest did a $100 million deal and it was hung up in the 15-year range.

“So in the belly of the curve, there is more cutting to do,” he said. “Munis will sell off to catch up once Treasuries slow down. It seems much more of the same. Inside five years, there is not cutting because there is so much demand there. But outside five years, there will definitely be more cutting this week and next week.”

Munis continued to weaken Thursday afternoon, according to the Municipal Market Data scale. Yields inside seven years were steady, while years outside eight years rose up to five basis points across the curve.

On Wednesday, the two-year held steady at 0.29%, its record low as recorded by MMD on Tuesday. The previous record of 0.30% was set Aug. 10. The 10-year yield rose one basis point to 1.85% while the 30-year yield jumped three basis points to 3.25%.

Since munis started weakening last Friday, the 10-year yield has jumped 19 basis points while the 30-year yields have risen 11 basis points.

Treasuries continued to weaken on positive news from Greece. The two-year yield rose two basis points to 0.28%. The benchmark 10-year yield jumped eight basis points to 2.06% while the 30-year yield rose seven basis points to 3.21%.

In the primary market, Barclays Capital priced $138.3 million of University of North Carolina at Charlotte general revenue bonds, rated AA-minus by Standard & Poor’s. Pricing details were not available by press time.

In the competitive market, Citi won the bid for $88.8 million of Frederick County, Md., general obligation bonds, rated Aa1 by Moody’s Investors Service, AA-plus by Standard & Poor’s, and AAA by Fitch Ratings.

Maturities ranged from 2014 to 2024. Prices were not yet available.

In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening.

Bonds from an interdealer trade of San Diego Community College District 5.25s of 2033 yielded 2.91%, 11 basis points higher than where they traded Wednesday.

A dealer sold to a customer Long Island Power Authority 5s of 2038 at 4.07%, seven basis points higher than where they traded Wednesday.

Another dealer sold to a customer New York City Municipal Water Finance Authority 5s of 2045 at 3.87% four basis points higher than where they traded Wednesday.

Bonds from an interdealer trade of Massachusetts 5.25s of 2025 yielded 1.65%, three basis points higher than where they traded Tuesday.

Since munis began weakening on Friday, muni-to-Treasury ratios have risen on the long end as munis underperformed and became cheaper. The 10-year ratio increased to 93.9% on Wednesday from 90.8% last Friday. The 30-year ratio rose to 103.5% from 102.2% last Friday.

The five-year ratio reversed, falling to 85.4% on Wednesday from 87.2% last Friday.

The slope of the yield curve continues to flatten. The 10- to 30-year slope fell to 140 basis points from 145 basis points on Friday.

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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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