Munis Mostly Unchanged in a Light Week

Tax-exempts were unchanged to slightly firmer Monday, kicking off what is typically one of the lightest weeks in the summer municipal market with a sparsely traded session.

Though 10-year and 30-year muni yields remained flat, 20-year tax-exempt yields dipped two basis points to match the all-time low established Wednesday.

"There's maybe a bit of firmness in spots, but overall we're pretty much unchanged," a trader in Los Angeles said. "It's just about the quietest week of the year kicking off here in the muni market, and it doesn't appear that 2010 is going to be an exception. There's not a lot of people around to begin with and there's just not a lot trading."

The Municipal Market Data triple-A scale again yielded 2.19% in 10 years and 3.30% in 20 years Monday, following 2.19% and 3.32% Friday. The scale yielded 3.69% in 30 years Monday to match Friday's mark.

Though yields showed little movement Monday, they have established new all-time lows in 10-year munis in 12 of the past 16 trading sessions. And 20- and 30-year tax-exempts have set new record lows four times in the past seven sessions.

The 20-year yield of 3.30% matches a record low established Wednesday, while 2.19% is only two basis points higher than the 10-year record of 2.17% also established Wednesday. The 3.69% level for 30-year bonds is two basis points higher than its all-time record of 3.67%, also established Wednesday.

"I'd say we're pretty much flat at this point, but there is still a firmer tone out there," a trader in New York said. "Even with yields moving up Friday, I think it's still very much a firm market out there, and there's a much better chance yields go down again today than rise."

Monday's triple-A muni scale in 10 years was at 86.2% of comparable Treasuries and 30-year munis were at 102.5%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 113.9% of the comparable London Interbank Offered Rate.

The Treasury market showed gains Monday. The benchmark 10-year note finished at 2.55% after opening at 2.64%.

The 30-year bond finished at 3.60% after opening at 3.69%. The two-year note was quoted near the end of the session at 0.51% after opening at 0.55%.

Investors clamoring for new supply will be faced with limited choices this week. Long-term volume in the tax-exempt market is expected to sink to an estimated $2.61 billion — less than half of last week's total — as trading and underwriting begin to wind down ahead of Labor Day, according to Ipreo LLC and The Bond Buyer.

After originally being earmarked at $4.77 billion, a revised $5.7 billion actually came to market last week, according to Thomson Reuters.

This week, even the short-term market is devoid of the significantly sized note deals that have propped up the primary market through much of the summer doldrums.

This week's calendar is even thinner, with a $245 million sale of higher education facilities revenue bonds from the Tennessee School Bond Authority taking the lead.

Planned for competitive pricing on Wednesday, the deal will consist of $226.9 million of tax-exempt bonds and $18.1 million of traditional taxable debt — both structured to mature serially from 2011 to 2040.

The bonds are expected to be rated Aa1 by Moody's Investors Service, AA by Standard & Poor's, and AA-plus by Fitch Ratings.

In the negotiated market, the Harris County, Tex., Flood Control District is on tap to issue $205 million of contract-tax refunding bonds, which will defease all or a portion of its outstanding commercial paper notes as well as pay the cost of issuance, according to the preliminary official statement.

Goldman, Sachs & Co. plans to price the deal on Tuesday with AAA ratings from Standard & Poor's and Fitch. In a report ahead of the deal, Fitch said the ratings are supported by the district's strong financial management and the conservative budgetary practices of the county's administrative team. Those practices include maintaining large financial reserves, high liquidity levels, and ample taxing margins.

In a commentary, Alan Schankel, managing director at Janney Capital Markets, wrote: "The coming week could be the slowest non-holiday week of the year for new municipal issuance, so we expect little additional sense of direction, other than following Treasuries lead, until after Labor Day."

Schankel wrote that next week we will see more market activity, with traders and bankers back from vacation and Congress teeing up several issues that have been on the back-burner this session.

"Perhaps the most significant is the status of [President George W.] Bush-era tax cut extensions," he wrote. "Assuming no action, top-bracket taxpayers will see their marginal rate jump from 35% to 39.6%, with other brackets rising as well. Under [Obama] administration proposals, the increase would only kick in for joint-filers with annual taxable income above $250,000 annually."

The second piece of legislation impacting the bond market is the stalled jobs bill, which includes provisions for extending Build America Bonds two additional years, albeit with reduced federal subsidy levels. The bill also will extend the cap increase for issuance of bank-qualified bonds, if passed.

In economic data released Monday, personal consumption expenditures rose 0.4% in July, as personal income rose 0.2%. Core PCE, which excludes food and energy costs, increased 0.1% for the month and 1.4% from a year ago. Disposable personal income, excluding taxes, increased 0.2%. Incomes and consumption in June were flat.

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