NEW YORK - The California municipal market was unchanged to slightly firmer Monday amid fairly light secondary trading activity.
"There's a little bit of a firmer tone, but we're mostly flat," a trader in Los Angeles said. "You can maybe pick up a basis point or two in spots, but it's been pretty quiet and there's not a ton trading. Overall, I'd say we're flat with a hint of firmness."
The Municipal Market Data triple-A 10-year scale declined one basis point Monday to 3.17%, the 20-year scale decreased one basis point to 4.39%, and the scale for 30-year debt remained unchanged at 4.66%.
Monday's triple-A muni scale in 10 years was at 94.9% of comparable Treasuries and 30-year munis were at 105.0%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 112.3% of the comparable London Interbank Offered Rate.
The Treasury market showed little movement Monday. The benchmark 10-year note was quoted recently at 3.33% after also opening at 3.33%. The 30-year bond was quoted recently at 4.44%, after opening at 4.43%. The two-year note was quoted recently at 0.61% after also opening at 0.61%.
In a weekly report, George Friedlander, senior municipal securities strategist at Citi, wrote that "yields in the tax-exempt market ratcheted up sharply for a variety of reasons; including a rush to market before the BABs program sunsets (at least for now), higher Treasury yields, an extremely clogged December calendar, and severe outflows from tax-exempt bond funds."
"Clearly, the demise of BABs, if it turns out to be permanent, would radically alter the yield structure and functioning of the tax-exempt market in a variety of ways," he wrote. "Nevertheless we believe that the dramatic increase in yield levels, and a sharp steepening of the muni yield curve, more than fully discounts these changes. We expect a strong 'January effect' to pull yields lower early next year."
Friedlander wrote they are thus focusing on longer intermediate maturities and for investors seeking higher yields and willing to take some market risk, long-dated revenue bonds. He also noted that the BAB program could be resurrected, which "would lead to an additional rally if attempts to re-open the program prove to be successful."
"We continue to stress difficulties in selling bonds on the bid side through year-end in order to make portfolio changes," he wrote. "For now, we would only sell the shortest, most liquid paper for this purpose, while focusing on putting available cash, if any, to work. We expect the bid side to firm up substantially in January."
Despite the challenges facing the market, Friedlander wrote, he anticipates a dramatic "January effect" in 2011 to put downward pressure on long-term yields.
John Dillon, municipal bond strategist at Morgan Stanley Smith Barney, wrote in a commentary that the true test for the market should begin in mid-January, when "a more robust new issue calendar that is likely more than 90% tax exempts enters the marketplace."
"It remains to be seen how well the longer-end of the tax exempt market reacts to the renewed supply," he wrote. "Only time will tell. Issuance may indeed be slow at the start of the year (as it often is), but buyers of the long end may be cautious until longer-term evidence of discipline on the issuer front surfaces (if at all)."
Either way, it is clear that this is currently a buyer's market, Dillon wrote.
"Accordingly, we do not advocate selling at this juncture," he wrote. "For those with the wherewithal to make a purchase in the current market, we believe value continues to reside in our core 6-to-14 year maturity range, as well as our 'opportunistic' extension out to 20 years."
The economic calendar was light Monday.
Previous Session's Activity
The most actively traded security in the state yesterday was California 3s of 2011, which traded 69 times at a high of 101.043 and a low of 100.028.
