The municipal market was weaker yesterday, following the Treasury market.
"I would say three to five basis points overall high in yield," a trader in Los Angeles said. "There wasn't a whole lot of trading, sort of a quiet Monday, but we definitely followed Treasuries down, on the Ambac news."
The Treasury market showed losses yesterday following stock market gains on affirmation by Standard & Poor's of the AAA ratings of Ambac Assurance Corp. and MBIA Insurance Corp.
The yield on the benchmark 10-year Treasury note, which opened at 3.80%, finished at 3.91%. The yield on the two-year note was quoted near the end of the session at 2.12%, after opening at 2.02%.
Trades reported by the Municipal Securities Rulemaking Board yesterday showed losses. Bonds from an interdealer trade of insured Los Angeles Unified School District 4.5s of 2025 yielded 4.74%, up three basis points from where they were sold Friday. Bonds from an interdealer trade of insured Puerto Rico Highway and Transportation Authority 5s of 2029 yielded 5.05%, three basis points higher than where they traded Friday. Bonds from an interdealer trade of New Jersey 5s of 2027 yielded 4.57%, up three basis points from where they were sold Friday.
In economic data released yesterday, existing home sales came in at 4.890 million in January after a revised 4.910 million the previous month. Economists polled by IFR Markets had predicted 4.840 million existing home sales.
Later this week, some significant economic data will be released, starting with the January producer price index and February consumer confidence index today. Tomorrow, durable goods for January will be released, as will January new home sales. Initial jobless claims for the week ended Feb. 23 and continuing jobless claims for the week ended Feb. 16 will follow on Thursday, along with the preliminary fourth-quarter gross domestic product. January personal income, January personal consumption, the January core personal consumption expenditures deflator, the Chicago purchasing managers index for February, and the final February University of Michigan consumer sentiment will be released Friday.
Economists polled by IFR are predicting a 0.3% rise in PPI, a 0.2% uptick in PPI core, an 81.3 consumer confidence index, a 3.5% dip in durable goods, a 0.7% drop in durable goods excluding transportation, 600,000 new home sales, a 0.7% increase in gross domestic product, 350,000 initial jobless claims, 2.800 million continuing jobless claims, 0.2% growth in personal income, a 0.2% uptick in personal consumption, 2.2% rise to the core PCE deflator, a 50.0 Chicago PMI reading, and a 70.0 level for the Michigan sentiment index.
In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, wrote that one key consequence of difficulties in the auction-rate securities market "has been a significant rebound in yields, both in absolute terms and as a percentage of Treasury/Libor yields."
"All along the yield curve from five years on out, muni yields as a percentage of Treasury yields are at all-time highs. Measured against Libor, yields along the curve are at 12-month highs," Friedlander said.
Last week, "a new source of challenges and complexity was added to the mix: higher short-term yields away from the auction-rate market," he wrote."
Two weeks ago, "a severe, and possibly chronic, shortage appeared to develop of short-term paper that would continue to be money fund eligible," Friedlander continued. "As a consequence, one-year muni yields dropped from 1.90% to 1.05% over the course of roughly 10 days. More recently, however, two things happened. First, tax-exempt money market funds saw some outflows in response to the decline in yields. More important, some issuers began to make the switch from auction-rate form to variable-rate form, adding significantly to supply."
Friedlander wrote that he expects the latter trend to continue - and even accelerate - as market participants identify additional ways for issuers to switch form without having to retire the auction-rate issue and start from scratch.
Matt Fabian, managing director at Municipal Market Advisors, wrote in a weekly report that "supply and demand for municipal bonds are sliding more deeply out of balance."
"Auction failures persist despite the introduction of substantial new, albeit yield-oriented buyers. This should continue for at least several weeks and auction-rate securities yields are unlikely to dip close to former absolutes without significant supply contraction," he wrote. "Further, poor returns and ever-wider bond insurance worries are moving more regular variable-rate demand notes from customer to bank balance sheets, exacerbating funding and thus selling pressure."
Fabian said this week, municipals are likely to struggle with "more of the same."
"The end of the month and some quarters may necessitate unfavorable price discovery," he wrote. "Auction failures should subside, although yields may not fall by much. Finally, new supply is being constrained by volatility and a lack of underwriting capacity - this removes one of our market's most potent price-leadership vectors."
In the new-issue market yesterday, Texas' Spring Branch Independent School District competitively sold $194.6 million of limited-tax schoolhouse bonds to Merrill Lynch & Co. The bonds mature from 2009 through 2031, with term bonds in 2034 and 2038. Yields range from 3.44% with a 5.25% coupon in 2014 to 4.41% with a 5% coupon in 2022. Bonds maturing from 2009 through 2013 and from 2023 through 2038 were not formally re-offered. The bonds are callable at par in 2017, and are backed by the state's triple-A Permanent School Fund guarantee program. The underlying credit is rated Aa2 by Moody's Investors Service and AA by Standard & Poor's.