The municipal market was unchanged to slightly firmer yesterday amid fairly light trading activity in the secondary, as participants await new issuance in the primary market later this week.
“There’s not a lot going on at this point,” a trader in New York said. “We’re fairly quiet and pretty much just unchanged. There doesn’t appear to be a lot of motivation on the part of traders right now — people are on the sidelines for the most part, it seems. There is a decent calendar this week, and I think people are just waiting on the new issues.”
“There’s a little bit of firmness out there, but not a whole lot,” a trader in Los Angeles said. “It’s mostly on the shorter end of the curve, but inside of 10 or so years, we’re probably better two or three basis points. The long end is pretty flat.”
“There is probably some demand coming up from reinvestments next month,” a second New York trader said. “As far as day-to-day basis, it’s not as if things are blowing up right now. I think you are going to see some small bumps in the scale on 10-year maturities. One, two, or three basis points, maybe. Not a lot of activity.”
The Treasury market was somewhat mixed yesterday. The benchmark 10-year Treasury note finished at 3.22% after opening at 3.24%. The 30-year Treasury bond finished at 4.11% after opening at 4.10%. The two-year Treasury note finished at 0.75% after opening at 0.77%.
The Municipal Market Data triple-A scale yielded 2.81% in 10 years and 3.65% in 20 years yesterday, following levels of 2.82% and 3.65% Friday. The scale yielded 3.96% in 30 years yesterday versus 3.96% on Friday.
Friday’s triple-A muni scale in 10 years was at 88.1% of comparable Treasuries and 30-year munis were at 97.3%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 102.6% of the comparable London Interbank Offered Rate.
Many investors will set their sights on Washington this week, where the pricing of $1.16 billion of taxable GO Build America Bonds is expected to be a record-setting event for both the state and the market — even though overall volume is expected to dip noticeably from last week.
The bonds will arrive amid an estimated $6.67 billion in total new volume expected to be priced this week, according to Ipreo LLC and The Bond Buyer. The total is down significantly from last week’s revised $9.63 billion, according to Thomson Reuters.
The Washington deal is the state’s largest-ever bond issue, and only the second negotiated one from the state treasurer’s office since 1996. It is also the fourth-largest BAB deal of 2010, and the highest-rated of all of this year’s billion-dollar-plus offerings, according to Thomson.
Both Standard & Poor’s and Fitch Ratings rate the bonds AA-plus. Moody’s Investors Service rates them an equivalent Aa1.
JPMorgan and Bank of America Merrill Lynch took indications of interest on the deal yesterday, which was tentatively priced to yield between 70 and 130 basis points over the comparable Treasury yields. The deal will be priced for institutions today.
Meanwhile, New York’s Empire State Development Corp. is preparing to issue $503.1 million of service contract revenue refunding bonds in a two-pronged deal. Wells Fargo Securities is expected to price the bonds tomorrow following a retail order period today.
The New York Division of Budget earlier yesterday said the state was considering putting the deal on hold due to the high cost of terminating swaps caused by European financial troubles.
However, Frances Walton, chief financial officer of the ESDC, said: “As of this moment, we’re going forward with it.”
“There will be a retail order period tomorrow morning, assuming there’s no drastic market change between now and then, just like with any bond sale,” Walton said. “The costs of the swaps have gone up, there has also been a decrease in yields on the bond side that has offset it, so we’re in fact slightly better off than we were when we made a decision to mail the POS. We have been analyzing it throughout the day and watching the markets, as of now we’re going forward.”
The ESDC deal, which is structured to mature serially from 2011 to 2022, will consist of $221.7 million of Subseries 2010 A-1 bonds and $281.4 million of Subseries 2010 A-2 bonds. The bonds are expected to carry ratings of AA-minus from Standard & Poor’s and Fitch.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote: “Municipal bonds had an excellent week last week as, despite the flight to safety in Treasuries, broad-based 'de-risking’ in some asset classes, and more rhetoric about just how bad municipal issuers are, muni yields trickled lower.”
“Of course, this meant dramatic underperformance versus Treasuries and Libor, damaging the return of hedged portfolios and dramatically increasing issuers’ cost of terminating outstanding swaps,” he wrote. “We don’t believe that the tax-exempt market has the capability to rally on pace with taxables — nominal yields are already too low despite scarcity of tax-exempt paper. Further, with the June reinvestment demand surge now imminent, our market may stay harnessed very much to where yields are right now, regardless of what goes on in taxables.”
In economic data released today, existing home sales increased at a 7.6% annual rate in April to 5.77 million sales.
Sales in March were revised to 5.36 million from 5.35 million reported last month.
Economists polled by Thomson Reuters expected 5.630 million existing home sales in April, according to the median estimate.
Priti Patnaik contributed to this column.