Munis Firmer in Light to Moderate Trading

The municipal market was slightly firmer yesterday in post-weekend light to moderate trading activity.Traders said tax-exempt yields were flat to lower by two or three basis points.

"I think we picked up a couple of basis points," a trader in Los Angeles said. "There wasn't much activity to speak of, but the tone is noticeably firmer. It's hard to really call it better by any substantial degree, just because there was so little activity, but if you pressed me, I'd say we probably picked up a basis point or two, maybe even three on the long end. But you could also call it mostly flat, just because there wasn't much activity, and I couldn't really argue."

"It's pretty quiet," a trader in New York said. "There's not a whole lot going on, but there's a firmer tone. I'd say we're fairly unchanged, just because there's not a whole lot trading, but there's a firmer tone."

The Treasury market showed some losses today. The yield on the benchmark 10-year note, which opened at 3.31%, was quoted near the end of the session at 3.36%. The yield on the two-year note was quoted near the end of the session at 0.91% after opening at 0.90%. The yield on the 30-year bond, which opened at 4.20%, was quoted near the end of the session at 4.24%.

As of Friday's close, the triple-A muni scale in 10 years was at 91.5% of comparable Treasuries, according to Municipal Market Data. Additionally, 30-year munis were 108.8% of comparable Treasuries. Also, as of the close, 30-year tax-exempt triple-A general obligation bonds were at 116.3% of the comparable London Interbank Offered Rate.

Municipal bond sales are set to pick up this week following an unusually light slate of offerings last week. Following a week in which issuers floated just $2.62 billion in paper according to Thomson Reuters, municipal bonds expected to be sold this week total $6.66 billion, according to Ipreo LLC and The Bond Buyer. Competitive offerings in particular are scheduled to accelerate, with $1.57 billion in competitive deals compared with $274.9 million last week.

Final pricing information was released on last week's $1 billion Los Angeles note deal, which was priced Friday by Goldman, Sachs & Co. The notes contained three different 2010 maturities, yielding 0.41% in February, 0.45% in April, and 0.46% in May.

Washington will lead the new-issue competitive calendar this week with a $765 million trio of general obligation bonds. The Evergreen State is selling $401.4 million of motor vehicle fuel-tax GOs, with maturities starting in 2010 and running through 2034. The state is rated Aa1 by Moody's Investors Service, AA-plus by Standard & Poor's, and AA by Fitch Ratings.

The biggest offering in the negotiated calendar is Iowa's I-JOBS Program special obligation bonds, Series 2009A and B, $602.4 million of taxable Build America Bonds. I-JOBS is a three-year, $830 million program designed to improve public facilities and invest in infrastructure. The issue is rated A3 by Moody's and AA by Standard & Poor's. Barclays Capital is lead manager.

In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote that "the municipal market has rallied well so far in July, with the earlier maturities seeing the best price performance."

"Last week, traders used enthusiasm from the stronger Treasury market, along with a very limited new issue calendar, to send prices higher, yields lower," he wrote. "This included bonds sold by California, where increased risk taking associated with the start of a new quarter continues to offset what was a week of troubling headlines over the budget and state-issued IOUs.

"This week, the economic calendar is limited," Fabian said, "with the highest-profile releases being retail sales and CPI, although bonds appear to be holding off inflationary fears for the time being. On the other hand, there is a substantially larger new-issue calendar that could in theory test the limits of the recent rally, although the schedule's heavy focus on Build America Bonds should bias our market to the positive once again. Additional strength may reflect longer-term mutual fund and bank buying, plus an at least temporary bump if California can sign a budget."

Morgan Stanley Smith Barney's George Friedlander wrote in a weekly report that there "are a variety of reasons for the overall strong tone in the muni market."

Friedlander wrote that these reasons include "a saw-toothed rally in Treasuries, light recent supply, availability of mid-year bond call/maturity money, the steep slope of the yield curve, continuing strong bond fund flows, reduced enthusiasm for riskier assets, an increased demand from banks, and willingness of dealers to take on some additional inventory."

In regard to increased appetite from dealers, Friedlander wrote, "as the muni market reshapes itself in the aftermath of the wrenching changes of the past two years, we are beginning to see more willingness of dealers to hold some munis in the secondary market. Candidates include existing dealers that are re-establishing risk positions, new combinations created out of the chaos of the past two years, and regional dealers that are beefing up by taking on experienced professionals who were 'downsized' when conditions in the capital markets collapsed."

The economic calendar was light yesterday.

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