With the end of 2008 in sight, and only two more full weeks of market activity before the traditional holiday hiatus, market participants are finding it difficult to both deal with any significant supply in the primary market and to make profitable trades in the secondary market.
The municipal market experienced weakness of three to five basis points overall yesterday - with losses of as much as 10 basis points on the long end - as Chicago elected to avoid current market conditions and postpone its sale of $600 million of new-money and refunding general obligation bonds until 2009. The deal was slated to price today.
Michael Pietronico, chief executive officer of Miller Tabak Asset Management, said that, in the current primary market environment, "two deals might be one too many."
"The market doesn't have the institutional capability to handle any kind of meaningful supply, and I would expect that retail will remain buyers, but not in any significant enough way to handle any reasonably sized calendar," Pietronico said. "And you're seeing that in the price action."
Retail buyers continue to be the biggest faction that is in buying mode at the present time, according to Laura Milner, fixed income portfolio manager at SCM Advisors LLC.
"They're the main force in the market and sometimes it takes longer to clear issues when that's the case," Milner said. "Although we've seen demand from retail, it takes the market longer to digest heavy issuance when retail is the top buyer."
Pietronico said even though retail demand was strongest inside five years, buyers nevertheless were after quality credits.
"It's also very credit specific, and part of the problem is that anything that might have even a tinge of credit risk to it is being overlooked, and those bonds continue to get weaker on a relative basis," he said. "At some point, that will be overdone, but you would probably need to see better economic data for that to occur.
Any change in buying attitude was unlikely until at least January, according to Pietronico, as the large forward calendar weighed on market sentiment.
"What needs to be worked off is the large forward calendar, and the only way that will occur in any meaningful way is for a large segment of the market to re-emerge as buyers," Pietronico continued. "The mutual fund industry seems to be losing cash, and the property and casualty area of the market seems to be sitting on their hands at the moment, so something has to change. A crossover buyer that has not been involved lately needs to come back, or the market will just continue to drift lower until that occurs. It will occur at some point, but it seems more likely to be in January than December."
Meanwhile, Milner said she is "a little bit concerned" that all the deals scheduled to price through the remainder of 2008 can get done.
"A big question is whether or not the Street is willing to underwrite deals that aren't fully subscribed and so far they seem pretty reluctant to do that," she said. "The underwriters just don't have the balance sheet capacity that they did in the past to underwrite deals and sit on them. Their risk appetite is just going to be tied to overall credit market recovery. The risk tolerance out there is basically zero and nobody wants to get stuck owning a muni deal that's hard to hedge even in a perfect world."
However, she noted that not all issuers "have the luxury to come to market only when conditions are favorable."
"If it's the kind of deal where they need the money to get the project going, then there's some urgency to get it done," Milner said. "They may have different regulations as to when a deal is authorized to come to market and when it actually needs to come to market. "
Marilyn Cohen, CEO of Envision Capital Management said that this month will not be an easy one for the muni market.
"I'm telling people how cheap [munis] are. If you don't buy munis now, what's it going to take? You want to buy them when all the news is bad, and it's terrible," she said. "The only positive prospects will be if retail crawls out from under its rock. The retail investor is the market. Are they going to have the appetite? I don't know because it's getting late."
In the secondary market, a trader in Los Angeles said that "a lot of people don't care" about secondary trading right now.
"It's getting to the point in the marketplace where people are starting to think more about Christmas presents than they are about buying bonds, and therein lies the problem," the trader said. "So, it's just sort of a lackluster market, and if they don't care, then there's not much we can do about it."
"There's been very little interest in the secondary market lately, mostly primary selling," a trader in New York added. "It's definitely weaker though. It just keeps deteriorating. You really can't sell anything, and that hurts."
The Treasury market showed some losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.70%, finished at 2.76%. The yield on the two-year note finished at 0.93%, after opening at 0.92%. And the yield on the 30-year bond, which opened at 3.12%, finished at 3.16%.
Yields on triple-A rated 10-year munis, which until this year rarely topped 100% of Treasuries by much, swelled to more than 160% last week, according to Municipal Market Data. Whereas munis have traditionally yielded less than Treasuries, the tax-free rate on a top-rated 10-year muni last week was a percentage point and a half higher than the rate on a Treasury note with a comparable maturity.
Cohen said the relationship between municipals and Treasuries right now is "the most out of whack I've ever seen it."
"Now this has been going on for a long time," she said. "The more Treasuries rally and munis don't do anything, that percent is just totally in the ozone."
In the new-issue market yesterday, JPMorgan priced for retail investors $308 million of general obligation bonds for New York City in two series. This was the second day of a two-day retail order period, preceding institutional pricing today. Bonds from a $300 million series of tax-exempt bonds mature from 2010 through 2031, with a term bond in 2035. Yields range from 2.70% with a 3% coupon in 2010 to 6.45% with a 6.25% coupon in 2035. The bonds, which are callable at par in 2018, are rated Aa3 by Moody's Investors Service, AA by Standard & Poor's, and AA-minus by Fitch Ratings. The deal also contains an $8 million taxable series, which matures in 2014 and 2015.
Wisconsin competitively sold $100 million of GO bonds to Barclays Capital, with a true interest cost of 5.30%. The bonds mature from 2012 through 2030, with yields ranging from 3.00% with a 5% coupon in 2012 to 5.76% with a 5.7% coupon in 2028. Bonds maturing in 2029 and 2030 were not formally re-offered. The bonds, which are callable at par in 2018, are rated Aa3 by Moody's, AA by Standard & Poor's, and AA-minus by Fitch.