The municipal market ended the session unchanged yesterday coming off early lows.
Traders said tax-exempts drifted back to flat later in the session after spending much of the morning weaker by as much as two or three basis points.
"We were down in the morning, for sure, but Treasuries turned around towards the middle of the day, and it eventually trickled down to our market and brought us back to flat," a trader in Los Angeles said. "I'd say we're finishing the day totally unchanged, primarily on that Treasury reversal. But we've been quiet all day, with not all that much trading."
After morning weakness, the Treasury market showed some gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.86%, finished at 3.85%. The yield on the two-year note was quoted near the end of the session at 2.42% after opening at 2.45%.
In economic data released yesterday, the Institute for Supply Management's non-manufacturing business activity composite index rose to 52.0% in April from 49.6% in March. Economists polled by IFR Markets had predicted the index would slip to 49.3%.
This week, another slate of data will be released. Preliminary first-quarter unit labor costs and preliminary first-quarter non-farm productivity will be released tomorrow, followed Thursday by initial jobless claims for the week ended May 3, and continuing jobless claims for the week ended April 26, along with March wholesale inventories and March wholesale sales.
Economists polled by IFR are predicting a 2.6% rise in unit labor costs, a 1.7% annual rate of non-farm productivity, 370,000 initial jobless claims, 3.000 million continuing jobless claims, a 0.5% rise in wholesale inventories, and a 0.7% gain in wholesale sales.
George Friedlander, managing director and fixed-income strategist at Citi, wrote in a weekly report that "the municipal bonds market continues to exhibit considerable day-to-day volatility, along with other fixed-income markets."
"This volatility appears to be related largely to confusion about the outlook for the U.S. economy, which was not ameliorated significantly by the Fed's action and announcement [last] Wednesday," Friedlander wrote. "It seems clear that the Fed will pause for now after the cut in fed funds to 2%. However, it is far from clear that the easing and other actions to date will be sufficient to pull the U.S. economy out of its ongoing doldrums."
While April ended with record-high volume of $43.8 billion, May is starting out on a sluggish note, with new issuance expected to decline significantly from last week. Essential service, health care, and transportation issues are among the largest deals expected to arrive in the primary market among an estimated $3.83 billion in new issuance, compared with a revised $9.35 billion last week, according to Thomson Reuters.
The New York State Environmental Facilities Corp. will headline the activity in the negotiated market when it sells $481.5 million of second resolution bonds to finance various New York City Municipal Water Finance Authority projects.
The deal - the largest of the week - will be priced by Depfa First Albany Securities LLC tomorrow after a retail order period today. The structure consists of $262.6 million of senior-lien revenue bonds in Series 2008A, which carries natural triple-A ratings from the three major agencies, and $218.9 million of subordinate state revolving fund bonds in Series 2008B, which are rated Aa1 by Moody's Investors Service, AA by Standard & Poor's, and AA-plus by Fitch Ratings.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote: "While current [market] conditions persist, supply will put pressure on bond prices and reduce secondary trading flow."
"We do see reasonable prospects for a better bid from tender-option bond programs and CDS-enabled proprietary desks by year end, although these are unlikely to emerge in sufficient strength to re-establish pre-crisis demand excesses," he wrote. "Thus, issuers should continue to face somewhat more difficult and costly conditions in accessing capital, including higher absolute yields and liquidity fees, wider underwriting spreads, more pre- and post-transaction disclosure responsibilities (as credit-sensitive buyers dominate), less access to bankers and underwriters, and more rigorous structural requirements."
In the new-issue market yesterday, Columbia, Mo., competitively sold $26.8 million of special obligation improvement bonds to Wachovia Bank NA with a true interest cost of 4.31%. The bonds mature from 2010 through 2021, with term bonds in 2023, 2024, 2026, and 2028. Yields range from 2.50% with a 4% coupon in 2010 to 4.62% with a 4.5% coupon in 2028. The bonds, which are callable at par in 2018, are rated AA-minus by Standard & Poor's and AA by Fitch.
Siebert, Brandford, Shank & Co. priced $17.7 million of unlimited-tax GOs for the Ann Arbor, Mich. Public Schools.The bonds mature from 2009 through 2025, with term bonds in 2026 and 2029. Yields range from 2.30% with a 3% coupon in 2009 to 4.74% with a 4.5% coupon in 2029. The bonds, which are callable at par in 2018, are rated Aa2 by Moody's and AA-plus by Standard & Poor's.