The municipal market was firmer yesterday as the week's largest deal was priced for retail.
Traders said tax-exempt yields were lower by four or five basis points, with high-grade bonds firmer by about five or six basis points.
"Things are a bit better again," a trader in New York said. "We're pretty much picking up right where we left off last week. We're seeing gains pretty much across the board. There's pretty decent demand out there, and it's just a nice, positive tone."
In the new-issue market yesterday, Goldman, Sachs & Co. priced for retail investors $750 million of electric system revenue bonds for Arizona's Salt River Project Agricultural Improvement and Power District. The bonds mature from 2011 through 2029, with term bonds in 2034 and 2039. Yields range from 1.71% with a 3% coupon in 2011 to 5.05% with a 5% coupon in 2039. Bonds maturing from 2025 through 2028 and in 2034 were not offered during the retail order period. The bonds, which are callable at par in 2019, are rated Aa1 by Moody's Investors Service and AA by Standard & Poor's.
Trades reported by the Municipal Securities Rulemaking Board yesterday showed gains. A dealer sold to a customer New York State Urban Development Corp. 5s of 2025 at 5.12%, six basis points lower than where they were sold Friday. Bonds from an interdealer trade of Wisconsin 5s of 2029 yielded 4.84%, down four basis points from where they traded Friday. A dealer sold to a customer California 5s of 2028 at 5.25%, five basis points lower than where they traded Friday. Bonds from an interdealer trade of insured Cook County, Ill., 5s of 2024 yielded 4.42%, down four basis points from where they were sold Friday.
"It was another positive day in the marketplace," a trader in Los Angeles said. "We seemed to get better and better as the day wore on, but ended up maybe five or so basis points better on the whole. Activity wasn't as accelerated as it's been the past week, but there was still plenty of business getting done."
The Treasury market showed gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.39%, was quoted near the end of the session at 2.30%. The yield on the two-year note was quoted near the end of the session at 0.73% after opening at 0.75%. The yield on the 30-year bond, which opened at 3.06%, was quoted near the end of the session at 2.99%.
As the first quarter begins to take shape and the municipal market faces $15.61 billion of 30-day visible supply, a handful of issuers plan to test the primary market with sizable deals amid thriving demand for attractive returns, despite last week's drop in yields.
The total volume in the competitive and negotiated markets this week is estimated at $4.85 billion, versus a revised total of $2.07 billion for last week, according to Thomson Reuters.
Elsewhere in the new-issue market yesterday, Morgan Stanley priced for retail investors $115 million of general obligation bonds for Delaware. The bonds mature from 2010 through 2029, with yields ranging from 0.57% with a 4% coupon in 2010 to 4.55% with a 4.5% coupon in 2029. The bonds, which are callable at par in 2017, are rated triple-A by all three major rating agencies.
RBC Capital Markets priced $105 million of certificates of participation for Adams County, Colo. The bonds mature from 2009 through 2029, with yields ranging from 1.20% with a 3% coupon in 2009 to 5.35% with a 5.125% coupon in 2029. The bonds, which are callable at par in 2018, are rated Aa3 by Moody's and AA by Standard & Poor's.
In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, wrote that he wasn't sure yield levels in the muni market would drop rapidly "once the New Year began in earnest."
"We were not entirely sure how the market would respond to the return of a new-issue calendar so quickly out of the shoot in January," he wrote. "Nevertheless yields have declined rapidly and across the board, for a variety of reasons.
"In some of the sectors that had been under the most pressure, such as tobacco securitization settlement bonds, yields have dropped as much as 200 basis points," Friedlander wrote. "Yield declines on long-term paper in other sectors includes a roughly 130 basis point drop in [Financial Security Assurance] and Assured Guaranty paper, similar amounts on double-A and A-rated hospitals, power authorities, and 100 to 110 basis points on other essential service revenue bonds."
Matt Fabian, managing director at Municipal Market Advisors, wrote in a weekly report that a government stimulus plan could provide direct aid to munis.
"Of course, the centerpiece of federal government intervention will be the stimulus program that may entail $300 billion or more of direct infrastructure aid to state and local governments," he wrote. "Some fraction of this total will be designated for 'shovel-ready' programs - with that definition likely subject to interpretation - which municipalities would otherwise finance through muni bonds this year and next. The stimulus could thus directly replace a portion of 2009 new-issue volume. However, we continue to see supply needs as so significant that, even with $300 billion of offsetting capital over the next two years, primary market supply may still approach an annual $400 billion."
"Yet any supply-pressure alleviation implies better muni performance and lower overall yields, although the benefit may be largely felt among high grade issuers who are likely to capture the bulk of federal grants," Fabian added. "If so, better high-grade performance would allow better benchmark curve performance, better evaluation, and better asset retention by mutual funds. Keep in mind that stimulus proposals remain undefined, and the current yield curve appears well overbought; thus, stimulus-related factors do not yet encourage total return buying."
The economic calendar was light yesterday.