NEW YORK – The municipal market was unchanged to firmer Monday against a backdrop of light to moderate trading activity in the secondary.
Traders said tax-exempt yields were mostly flat, but lower by two or three basis points on the long end.
“There isn’t a whole lot happening inside 20 years or so, but there are some gains out long,” a trader in San Francisco said. “We’re picking up maybe three basis points out on the long end, but overall, there isn’t a ton of secondary trading. It’s fairly quiet, and we have another pretty quiet week ahead in the primary.”
The Municipal Market Data triple-A 10-year scale was unchanged Monday at 3.42%, the 20-year scale declined three basis points to 4.71%, and the scale for 30-year bonds dropped four basis points to 4.86%.
In the daily MMD commentary, Randy Smolik wrote that market direction for high-grade bonds in the 20- to 30-year range was still a “one-way street to lower yields.”
“As selling dried up, the pendulum swung wildly the other way,” he wrote. “Traders still have reservations about short and intermediate markets.”
Monday’s triple-A muni scale in 10 years was at 100.6% 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 113.3% of the comparable London Interbank Offered Rate.
Treasuries were slightly firmer Monday. The benchmark 10-year note was quoted recently at 3.40% after opening at 3.41%. The 30-year bond was quoted recently at 4.56% after also opening at 4.56%. The two-year note was quoted recently at 0.63% after opening at 0.64%.
Volatility and speculation about defaults and bankruptcies in the municipal market continue to spook issuers and investors, affecting volume in the primary market.
Only $2.7 billion is expected to be priced this week, according to Ipreo LLC and The Bond Buyer.
The estimate is around one-quarter of the average weekly volume. It is only slightly more than Thomson Reuters' revised $2.16 billion that priced last week while municipals struggled to rebound from a sell-off that hurt the tax-exempt market in the week ended Jan. 14.
A $575 million hospital revenue offering for the California Statewide Communities Development Authority on behalf of Sutter Health will lead the way in the new-issue market this week.
The California financing will be priced by Morgan Stanley and come in two parts - Series 2011 A issued by the California Statewide Communities Development Authority and Series 2011 B issued by the California Health Facilities Financing Authority.
Both are expected to be rated Aa3 by Moody's Investors Service and AA-minus by both Standard & Poor's and Fitch Ratings.
Morgan Stanley this week will price $300 million of debt for the Dormitory Authority of the State of New York, on behalf of Columbia University.
The credit is rated triple-A by both Moody’s and Standard & Poor’s.
In the competitive market Thursday, the Port Authority of New York and New Jersey will sell $300 million of consolidated bonds. The debt is set to mature from 2030 through 2041 and will be callable at par in 2041.
Also, triple-A rated Fairfax County, Va., will sell $192 million of debt Tuesday in the competitive market. The bonds are set to mature from 2012 through 2031 and will be callable at par in 2021.
In a research note, George Friedlander, municipal strategist at Citi, wrote that attractive opportunities abound in the municipal market for the careful investor.
“The municipal bond market finally reached a resting point over the second half of last week, with yields actually declining modestly in some sectors,” he wrote. “We cannot be confident that the worst is over until bond funds stop experiencing severe outflows. Nevertheless, a key component of the ‘feedback loop’ that has pulled tax-exempt yields sharply higher — projections of widespread defaults and bankruptcies on local credit — will, we are confident, turn out to be vastly overstated.”
He also noted that, “as the realization of this likely outcome takes hold in coming weeks and months, the fund outflows should decline and the muni market should reach a more lasting equilibrium, at the very least, or even rally fairly sharply.”
“For most investors, whose portfolios’ average maturity and average yield has gotten painfully short, we view the current market disarray as an opportunity to lengthen maturity, add to current yield and, ultimately, possibly achieve a bit of price appreciation in addition,” Friedlander wrote.
Additionally, Alan Schankel, managing director at Janney Capital Markets, wrote in a note to investors that “there will be no rash of defaults.”
“Since 1980 there have been municipal bankruptcies each year, averaging 12 annually, including 10 in 2009 and six last year,” he wrote. “We will likely see more defaults and even bankruptcies, primarily in the more risky sectors such as land-backed issues, multi-family housing, senior living and health care. The jury is out on issuers such as Harrisburg and Detroit Schools, but problems are largely isolated based on specific issuer circumstances.”
Schanckel wrote that it would be “reckless” to predict a number of “safe sector” defaults for 2011 – those in general obligation, water and sewer and sales tax – but said it will be closer to 10 than the 50 to 100 predicted by Meredith Whitney.
The economic calendar was light Monday.
Visible Supply
The Bond Buyer's 30-day visible supply rose $260.8 million to $8.562 billion. The total is comprised of $1.985 billion of competitive bonds and $6.577 billion of negotiated bonds.
Previous Session's Activity
The Municipal Securities Rulemaking Board reported 51,117 trades of 18,249 issues for volume of $13.10 billion. Most active was taxable Chicago 7.781s of 2035 that traded 389 times at a high of 105.000 and a low of 99.500.
