NEW YORK – Substantial supply-driven weakness continued to plague the California municipal market Tuesday amid a rout that saw several deals pulled from the calendar and 30-year yields shoot to 15-month highs.
Traders said municipals were weaker by about 10 to 12 basis points overall, though losses extended up to 20 basis points in spots.
“The Street is not supporting the market and there is a lot of uncertainty over what bonds are worth. Without some more certainty with regard to pricing and relative value, no one wants to be the first one back in buying until we see more support,” said Parker Colvin, managing director of underwriting at Stone & Youngberg LLC in San Francisco. “The correction of the last seven or eight trading days continued to pick up momentum, and the secondary market pressure and a lot of supply was working in combination to move prices lower.”
The Municipal Market Data's triple-A scale yielded 2.93% in 10 years Tuesday, 18 basis points higher than Monday’s 2.75%, while the 20-year scale yielded 4.03%, 15 basis points more than Monday’s 3.88%. The scale for 30-year debt climbed 12 basis points to 4.42% Tuesday from 4.31% Monday.
The MMD 30-year triple-A scale has now increased by 50 basis points since last Monday to its highest level in nearly 15 months, since when it was also 4.42% on Aug. 28, 2009.
Meanwhile, 20-year debt is at its highest level since Aug. 19, 2009, when it yielded 4.04%, and 10-year yields are at their highest level in close to four months, since June 23, when the yield was 2.94%, according to MMD.
Tuesday’s triple-A muni scale in 10 years was at 102.8% of comparable Treasuries and 30-year munis were at 103.8%, according to MMD, with Tuesday’s weakness pushing both past 100%. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 108.3% of the comparable London Interbank Offered Rate.
The weakness also prompted a number of refunding deals to be pulled from the market. Beyond refundings, however, a $157 million Orange County, Calif., Sanitation District taxable Build America Bond sale was also postponed indefinitely due to market conditions.
“Investors are cautious about getting back into the market until they see more signs of broader support,” Colvin said. “Munis could easily get oversold and when it’s a steady downdraft like this, buyers will be very reluctant to come back in all at once, or by themselves. If there is any cash remaining to be put to work, the levels are now getting attractive enough to overcome the fears of the sell-off and begin selectively putting cash to work.”
Colvin also noted that long end yields in the California market trades were substantially wider than just two weeks ago, with a $2 billion long-term BAB deal still to come this week. He cited Bay Area Toll Authority revenue bonds due in 2032 that traded at a 5.40% yield Tuesday, which compares to its original 4.51% yield in late October.
“By that measure the market is up 91 basis points in two and a half weeks,” he said.
Tuesday’s Treasury market showed gains as recent price cuts and data showing weak growth and absence of inflation drew buyers in the opening days of the Federal Reserve's program of large-scale Treasuries purchases to spur economic growth.
The benchmark 10-year note was quoted recently at 2.84% after opening at 2.95%. The 30-year bond was quoted recently at 4.27%, after opening at 4.41%. The two-year note was quoted recently at 0.51% after opening at 0.53%.
Also Tuesday, the retail order period continues on a $10 billion revenue anticipation note sale from California to support its cash-flow needs for the 2010-2011 fiscal year.
Lead manager JPMorgan will price the offering for institutional investors Wednesday, following a two-day retail order period that began Monday. The deal breaks the previous record, also set by the Golden State, of a $9 billion sale of Rans in October 2002, according to data from Thomson Reuters.
During the first day of the retail order period Monday, California sold 44.3% of the total offering, a total of $4.43 billion.
Of the notes maturing on May 25, 2011, $563.6 million was sold to retail Monday, while $3.86 billion of debt maturing on June 28 of next year went to retail.
According to the state Treasurer’s office, preliminary prices quoted to investors during the retail period were 1.0% to 1.25% for the May maturity and 1.25% to 1.50% for the June maturity.
The California Rans, whose principal and interest is payable exclusively from unapplied money in the state's general fund, are rated MIG-1 by Moody's, SP-1 by Standard & Poor's, and F2 by Fitch. California's long-term GO ratings stand at A1 from Moody's and A-minus from Standard & Poor's and Fitch.
In economic data released Tuesday, the producer price index increased 0.4% in October as core prices unexpectedly declined 0.6% on lower prices for new autos.
Core prices, excluding food and energy, dropped following 11 months of increases. The October decline came from lower auto prices. Every October, the Labor Department incorporates new model-year autos to the producer price index.
Economists expected producer prices would rise 0.8% and core prices would increase 0.1%, according to the median estimate from Thomson Reuters.
Industrial production was unchanged in October, while capacity utilization was 74.8% for the month. Economists expected industrial production would increase 0.3% for the month and capacity utilization would be 74.9%, according to the median estimate.
Previous Session's Activity
The most actively traded security in the state yesterday was taxable Los Angeles 7.842s of 2040, which traded 230 times at a high of 102.500 and a low of 99.450.
