Municipal bond yields were steady on all points of the curve Monday as Treasuries experienced a modest firming.
The steadiness halted a 13-session trend of rising yields, but traders weren’t reading much into that, given how slow the pace of trading was Monday.
“The market was very quiet today,” a trader in Florida said. “The bid side was a touch easier, but there wasn’t enough activity to make a call.”
While absolute yields were flat, their relative value appeared slightly more attractive against the backdrop of lower Treasury yields.
“Sellers aren’t really motivated right now because hedges are probably losing money today, so it’s sort of a down-bid if you’re losing money in the hedges as well,” a trader in New York said. “It’s a stalemate between buyers and sellers. Until we see new deals come, I think it’s going to be a tough slog to see where the secondary goes.”
The steadiness helped 10-year and 30-year muni-to-Treasury ratios climb above their respective three-month averages, Randy Smolik, analyst at Municipal Market Data, wrote in his daily commentary.
The 10-year and 30-year tax-exempt yield offered 93.3% and 107.1% of the comparable Treasury yield, according to MMD. The three-month averages are 92.4% and 105.4%, respectively.
“High ratios and attractive absolute levels are shutting down selling pressure, but muni market needed buying leadership,” Smolik wrote. “Absolute yields should also make one wonder ponder about being a buyer than a seller.”
The 10-year tax-exempt yield kicked up 31 basis points from March 16 to Friday, then stayed flat Monday at 3.21%, according the MMD triple-A scale.
The two-year yield remained at 0.68%, its highest yield since March 11. The 30-year remained flat at a comparatively cheap 4.80%.
The 10-year Treasury note finished the day at 3.43%, one basis point firmer than Friday’s close, while the two-year note closed two basis points lower at 0.78% and the 30-year bond remained flat at 4.48%.
“I would bet the Treasury rally is not quite over with yet,” the Florida trader said, indicating that munis could look more attractive relative to Treasuries going forward.
He said the municipal market could be seeing “buyer apathy” given how much yield tax-exempts have given up since mid-March.
The New York trader said some tax-exempts in the 15-16 year range were down about five basis points from Friday, but he called it “just clean-up of existing deals to make room for new deals coming up.”
In the new-issue market Monday, two dozen banks led by Wells Fargo Securities priced $500 million of future tax-secured subordinate bonds for the New York City Transitional Finance Authority.
The authority intends to have all the bonds placed with retail buyers Monday and Tuesday, according to the pricing wire. The deal is offered in two series, each maturing between 2012 and 2025, with tax-exempt yields ranging from 0.65% to 4.15%.
The bonds were rated AAA by Standard & Poor’s and Fitch Ratings, and Aa1 by Moody’s Investors Service.
The underwriter wouldn’t comment on the deal’s progress. A New York trader said the sale appeared to be going well on the short end, but banks may be finding if difficult to sell the intermediate maturities.
“There is cash to be spent, but it’s inside of five years,” he said. “Outside of that, it’s hard to place bonds right now.”
Low demand and light issuance have been the dominant market theme for at least a month, as issuance in the first quarter was the slimmest in a decade.
New supply is anticipated to total $3.3 billion this week, or just less than the $3.7 billion weekly average of 2011. The week before saw $2.4 billion get sold, while the weekly average of last year was $8 billion.
“The story remains the same,” said Alan Schankel, managing director at Janney Capital Markets. “Not much supply and tepid demand describes the municipal market looking both forward and back.”
John Hallacy, manager of municipal research at Bank of America Merrill Lynch, wrote in a note published Friday that issuers were waiting on the sidelines as the twin debate on spending cuts and possible tax hikes dominates sentiment across the country.
“The market malaise may be attributed to a heightened perception of state and local government credit risk,” he wrote.
These same credit concerns have also caused investors to be skittish, according to Smolik. He said the market is “now in limbo with a lack of demand for long-term paper coupled with many issuers reluctant to sell debt while facing budgetary pressures.”
Credit concerns became more vocal last week when Standard & Poor’s slashed DeKalb County, Ga., to BBB from AA-minus, and then withdrew its rating on the premise that not enough information was available.
The county’s most recent audit was in 2009, according to Natalie Cohen, senior muni analyst at Wells Fargo. She pointed out the county has been rated triple-A as recently as January.
The county’s woes stem in part from the incorporation of Dunwoody, a city of 46,000 that previously contributed nearly 12% of DeKalb’s property tax base.
“The county has put itself into deep financial trouble,” Cohen wrote. “Between 2008 and 2009, the county’s net assets fell by nearly $40 million — not a fatal amount, but S&P indicated further decline in 2010 and insufficient action to manage its finances.”
A trader in Florida said the unexpected downgrade has market participants on edge, as some worry other counties could see similar credit deterioration.
Hallacy said a default from the county remains unlikely, but the case does highlight a major problem in the market — protracted lags between fiscal year-ends and the release of audited statements “invariably leave analysts and investors to grapple with obsolete financial reports, forcing market participants to speculate on contemporary financial conditions.”
The downgrade is “disquieting,” he wrote.
“The ensuing withdrawal of such rating in the span of three months is deleterious to the credibility of a ratings system, particularly as a time when the financial integrity of the asset class is being questioned.”