Light to moderate trading conditions and a firm tone pervaded the market yesterday while underwriters deferred pricing a scheduled $650 million deal for New York’s Metropolitan Transportation Authority.
Traders said yields remained firm throughout the day, outperforming the Treasury market, where yields rose.
“Secondary trading was light and the [primary] market was unchanged to slightly improved throughout, and the new-issue pricings were firm,” one trader in New York said. “It’s hard to say why secondary trading was so light. The truth of the matter is that it’s still inquiry-driven — there’s an overall caution out there based on not knowing where this market is going, not knowing where interest rates are going. You can see this in almost everything.”
Another trader in California said the market was dead in the morning but showed more activity towards the end of the session.
“In the last hour we’ve been busy,” the trader said. “It’s not crazy busy — I wouldn’t call it a rally — but people have perked up their heads due to putting some bonds away to retail.”
The California trader said participants in the local market are tired of trading Golden State general obligation bonds.
“If I had a really good offering on a different name, I’d have a dogfight to sell those bonds,” the trader added.
In the new-issue market, Barclays Capital withheld its scheduled pricing of $650 million of transportation revenue bonds for the MTA. The decision came as Moody’s Investors Service downgraded the authority’s bonds to A3 from A2 earlier in the day.
“The rating action was prompted by the MTA’s revenue deterioration over the past several months, leading to increased financial strain and liquidity pressure after the MTA had already addressed declining revenues by reducing spending and proposing service cuts to take effect later this year,” Moody’s analysts wrote in a press release.
A source familiar with the pricing said until all the rating agencies have been heard from, the pricing was tentatively on hold.
Spokespeople from Barclays and the MTA would not comment. Fitch Ratings affirmed its A rating with a negative outlook, but stated that it “could take an adverse rating action” if the MTA is unable to combat the anticipated $350 million budget shortfall for 2010. Calls to Standard & Poor’s were not immediately returned for comment.
The $650 million deal was supposed to be the day’s biggest new issue. The planned issue included $550 million of taxable, direct-pay Build America Bonds and $100 million of traditional tax-exempt bonds.
In the Treasury market, yields were higher across the curve, particularly in the long end as the market looked to tomorrow’s January non-farm payrolls employment report.
The benchmark 10-year note closed with a yield of 3.70%, six basis points higher than Tuesday’s closing yield of 3.64%. The yield on the two-year note finished at 0.89% after closing Tuesday at 0.85%. The yield on the 30-year bond was 4.64%, eight basis points higher than on Tuesday.
The Municipal Market Data triple-A scale yielded 2.96% in 10 years and 3.82% in 20 years, both unchanged from Tuesday. The scale yielded 4.20% in 30 years, also unchanged from Tuesday.
In other new-issue activity, Morgan Stanley priced $405 million of education loan revenue bonds for the Massachusetts Education Finance Authority, following a retail order period yesterday. The deal includes a $318.5 million series of tax-exempt education revenue bonds maturing between 2012 and 2030, with coupons ranging from 2.00% to 5.30%. A second series of bonds subject to the alternative minimum tax totaling $86.5 million mature from 2012 to 2031 with coupons ranging from 2.55% to 5.70%. Both series are rated AA by Standard & Poor’s and A by Fitch.
Elsewhere, Citi priced $195 million of Indianapolis Local Public Improvement Bond Bank bonds yesterday in the first of two borrowings that will finance construction of a new, $754 million safety-net hospital for Marion County.
The bonds were divided into two series, $40.8 million of tax-exempt, fixed-rate Series 2010A-1 bonds that will mature from 2013 through 2022 with coupons ranging between 3.00% and 5.00%, and $154.2 million of taxable, direct-payment Series 2010A-2 BABs.
The BABs were offered as term bonds due in 2030 and in 2040, yielding 5.85% and 6.00%, respectively, before the federal subsidy, or 3.80% and 3.90% after the 35% federal subsidy.
In economic data released yesterday, the Institute for Supply Management reported that its January non-manufacturing index rose to 50.5 from 49.8 in December, indicating that the services sector expanded slightly. The increase was below market expectations of 51.0.
Also, the ADP survey of private employment found that 22,000 jobs were lost in January, the smallest monthly decline in two years. Economists had been expecting a decline of 30,000.
Conrad DeQuadros, economist at RDQ Economics LLC, said Treasury yields rose as both economic indicators were consistent with the market’s optimism for tomorrow’s non-farm payrolls indicator. The ADP report showed back-to-back monthly gains in the services sector and the decline in manufacturing jobs was the smallest decline since January 2008, he noted, while the ISM survey showed a smaller contraction in employment compared to previous months.
“Obviously there’s nothing suggesting robust payroll growth, but there is the suggestion in a number of reports today that the labor market in January is better than what we saw in December, and so maybe the market is setting up for a report on Friday that suggests that as well,” he said.
