The municipal market was firmer Wednesday on a quiet day capping a tumultuous year for munis.
In a shortened trading session for New Year's Eve, a trader in Chicago said the market was stronger by a basis point or two.
"There's money out there to buy bonds, and some are still willing to pay big bucks," the trader said. "It's quiet, but it's still firmer like it's been these last few days."
The Bond Buyer municipal bond index hit 98-22, up from 98 a day earlier and 97-12 a week ago. A month ago, the index was at 95-18.
Munis closed out 2008 with a rally, recouping some value after significant losses for much of the second half of the year.
According to Municipal Market Data, yields on high-quality paper are now back to levels seen before the Lehman Brothers Holdings Inc. bankruptcy, which threw stock and bond markets into bedlam.
For example, the yield on 10-year, triple-A rated munis was 3.52% Wednesday, according to MMD, roughly the yield in mid-September before the Lehman bankruptcy. Yields on this maturity in 2008 peaked at more than 4.85% in October.
Meantime, for single-A rated munis, yields have compressed by nearly half a percentage point in the past three weeks, though they remain far higher than a year ago.
The yield on single-A rated, 10-year munis was 4.95% Wednesday, according to MMD, compared with an apex of 5.65% in October.
"The market was screaming to be bought," said Fred Yosca, managing director and head of trading at BNY Capital Markets LLC. Yosca said munis are "extremely" cheap compared with Treasuries and many other fixed-income investments.
Still, Yosca cautioned against reading too much into this rally. For one thing, the true complexion of supply and demand is obscured by an inventory shortage as many issuers and dealers are on vacation, he said.
Further, the muni market has undergone two bust-and-boom cycles since the Lehman bankruptcy. As financial markets remain illiquid and unsettled, Yosca said this volatile pattern will likely repeat several times next year.
Meanwhile, value in the muni market will be driven by credit quality, Yosca said. The market is giving a much more discriminating eye to credit now after a period when spreads were too slim, he said.
"Credit is king," Yosca said. "It's all credit-driven. ... An A-rated bond doesn't get any respect." With the nation a year into a recession, top-notch credit ratings may become that much harder to find.
This recession may lead to more downgrades than any other recession in the past 40 years, Moody's Investors Service said in a report Wednesday.
Local governments are likely to suffer a "precipitous" decline in property taxes and other revenue sources stemming from real estate, along with curtailed state aid and shrinking sales taxes, Moody's said.
Trades reported to the Municipal Securities Rulemaking Board were firmer. A dealer sold to a customer a California general obligation refunding bond 5s maturing 2024 at a yield of 5.36%, down three basis points the previous day. A customer sold to a dealer a New York Metropolitan Transit Authority transportation revenue 4.5s bond maturing 2036 at a yield of 6.05%, down three basis points from the previous day.
There were no new issues on the calendar, in either the competitive or negotiated sectors.
The strength in the muni market contrasted with weakness in Treasuries during the final trading session of 2008. The yield on the benchmark 10-year Treasury note climbed 18 basis points to 2.23% after a report on jobless claims was not as bleak as expected.
The Labor Department reported 492,000 initial jobless claims were submitted during the Christmas week, a decline of 94,000 claims and shy of the 550,000 claims economists polled by Thomson Reuters expected. Nevertheless, continuing claims for the week of Dec. 20 were 4.506 million, which outpaced economists' expectations of 4.38 million.
The yield on the two-year note ticked up to 0.77%, after opening at 0.72%. The yield on the 30-year bond, which opened at 2.55%, climbed to 2.68%.
The uncorrelated movement in munis and Treasuries Wednesday was in keeping with a pronounced trend in 2008 - the two markets decoupled.
A year ago, the yield on 10-year, triple-A rated munis was 90% of Treasuries with comparable maturities, according to MMD. This was typical.
Earlier this week, the yield on 10-year, triple-A rated munis was more than 170% of Treasuries.