NEW YORK – The California municipal market was unchanged to slightly firmer Monday amid light secondary trading activity on the first full trading day of 2011.
“There’s a firmer tone, though I think it’s mostly flat,” a trader in Los Angeles said. “You could pick up a basis point or two maybe in the belly of the curve, but the secondary is pretty quiet and there isn’t a whole lot of movement.”
The Municipal Market Data triple-A 10-year scale was rose five basis points Monday at 3.21%, the 20-year scale increased eight basis points to 4.47%, and the scale for 30-year debt held at 4.68%.
In the daily MMD commentary, Randy Smolik wrote: “The MMD roll from December to January maturities typically will cause generic spots on the curve to rise, like the generic 10yr spot rising from 3.16% last Friday to 3.21% today.”
Monday’s triple-A muni scale in 10 years was at 96.7% of comparable Treasuries and 30-year munis were at 106.8%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 112.5% of the comparable London Interbank Offered Rate.
The Treasury market was weaker Monday. The benchmark 10-year note was quoted recently at 3.34% after opening at 3.29%. The 30-year bond was quoted recently at 4.40% after opening at 4.33%. The two-year note was recently quoted at 0.60% after opening at 0.58%.
Municipalities will continue their hiatus from borrowing money this week as they are once again slated to sell a meager amount of new debt.
State and local governments are scheduled to sell just $723.6 million of bonds this week, according to The Bond Buyer and Ipreo data, an uncommonly small amount of debt.
This comes on the heels of a final week of 2010 in which a solitary issuer was scheduled to sell a measly $525,000 bond issue.
This is the supply lull municipal market participants were looking forward to during the paroxysm of bond sales in the fourth quarter. A $131.2 billion flurry of debt issuance in the fourth quarter helped propel the municipal bond market to a record $431 billion of issuance in 2010.
This barrage of new bonds put the skids on the municipal rally that brought yields to all-time lows late in the summer.
As the municipal bond market was stuffed with week after week of $10 billion-plus in new issuance in the fourth quarter, trading desks eying rising Treasury yields were wary of taking on bonds. The market had trouble finding buyers for all the new debt without offering higher rates.
Now that supply has all but vanished, the market isn't exactly falling over itself to buy bonds. Yields have eased down nine basis points from their near-term peak of 3.25% on Dec. 16, according to the Municipal Market Advisors 10-year triple-A scale, but remain about 50 basis points above where they were at the end of the third quarter.
This may simply be because buyers are on vacation, but it likely reflects, at least in some part, selling from mutual funds. Municipal bond mutual funds became a more critical buyer in the past two years as they were awash in $69 billion of new money from investors in 2009 and an additional $32.2 billion of inflows the first 10 months of last year.
Investors suddenly began taking money out in November, and mutual funds have contended with more than $17 billion in outflows the past two months, according to the Investment Company Institute. Redemptions typically force mutual funds to sell bonds to raise the cash to return to investors.
Alex Rorke, head of public finance at Loop Capital Markets, said January is traditionally “a very good month” for municipals as a curtailment in supply is met with reinvestment money from coupon payments on existing bonds.
“We expect to see very strong demand,” Rorke said.
In economic data released Monday, the overall economy grew for the twentieth straight time, while the manufacturing sector expanded for the seventeenth time, the Institute for Supply Management reported.
According to the ISM’s monthly report on business, the ISM index crept to 57.0 in December from 56.6 in November. Economists polled by Thomson Reuters predicted the index would rise to 56.9.
Construction spending increased 0.4% in November, stronger than economists expected, as private construction continued to gain.
.
Private construction increased 0.3% for the month, the third consecutive monthly rise. Private residential construction increased 0.7% as nonresidential construction slipped 0.1%.
Economists expected total construction spending would increase 0.2%, according to the median estimate from Thomson Reuters.
Previous Session's Activity
The most actively traded security in the state yesterday was California 6.5s of 2033, which traded 27 times at a high of 108.750 and a low of 106.750.
