NEW YORK - The municipal market was unchanged to slightly firmer Monday amid fairly light secondary trading activity.
"It's fairly quiet," a trader in New York said. "The primary has a couple deals on it that people might be paying some attention to, but it's literally a couple, and that's later in the week. The further we go this week, the quieter it's going to get, but today was pretty quiet too. We're maybe better a basis point or so, and the tone was definitely a bit firmer, but activity was muted."
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%.
"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."
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%.
The flood of new supply that has inundated the municipal bond market the past month will die out this week as issuers take a breather from selling new debt.
State and local governments are slated to sell just $709.3 million this week, according to data from The Bond Buyer and Ipreo, and could see as much $2 billion. The lull in the storm is a welcome reprieve for a market that absorbed a tidal wave of $11.16 billion last week. Eight billion is typical.
Heavy supply has been one of the primary factors cited in the thrashing of municipal bonds the past two months, during which the yield on the benchmark triple-A rated 10-year municipal bond has spiked nearly 90 basis points. According to Bloomberg LP, the market has digested $54.1 billion in new supply the past five weeks, and $107 billion the past 10.
The biggest deal of the coming week by far is a $1.31 billion negotiated offering from the New York Liberty Development Corp., underwritten by Goldman, Sachs & Co. Because the sale date has not been established yet, it is not included in the estimate for total weekly issuance.
The money will be lent to Larry Silverstein to partially finance the construction of 3 World Trade Center, a planned 62-story office building with 2.1 million square feet of office space at the World Trade Center site in New York City. The loan will be repaid with money collected from renting out the office space.
Repayment of the debt is guaranteed by the Port Authority of New York and New Jersey, which owns the land the building is being constructed on. The bonds are rated AA-minus by Standard & Poor's, mainly reflecting the Port Authority backing.
Also in the negotiated market, the Utah State Board of Regents is floating a $389.5 million student loan revenue deal underwritten by RBC Capital Markets. The issuer expects the bonds to be rated triple-A by Standard & Poor's and Moody's Investors Service.
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.
Visible Supply
The Bond Buyer's 30-day visible supply rose $225.5 million to $8.335 billion. The total is comprised of $767.5 million of competitive bonds and $7.568 billion of negotiated bonds.
Previous Session's Activity
The Municipal Securities Rulemaking Board reported 52,207 trades of 17,323 issues for volume of $16.50 billion. Most active was Ohio's taxable American Municipal Power 7.3s of 2030 that traded 674 times at a high of 102.600 and a low of 99.750.
