The municipal market was largely unchanged yesterday in light activity."It's pretty quiet," a trader in New York said. "This whole week is going to be fairly quiet. We have a light new-issue calendar and Labor Day approaching. I really don't expect too much activity or too much movement. And it's certainly quiet and pretty flat now."
"There's not a whole lot going on," a trader in Los Angeles said. "There's not a lot trading, and just not a lot of people involved today. I'd imagine that will be the case for much of the week, as well. We're just pretty quiet and unchanged."
The Treasury market showed some gains yesterday. The yield on the benchmark 10-year note, which opened at 3.45%, was quoted near the end of the session at 3.41%. The yield on the two-year note was quoted near the end of the session at 0.98% after opening at 1.02%. The yield on the 30-year bond, which opened at 4.20%, was quoted near the end of the session at 4.18%.
As of Friday's close, the triple-A muni scale in 10 years was at 85.5% comparable Treasuries, according to Municipal Market Data, while 30-year munis were 105.0% of comparable Treasuries. As of Friday's close, 30-year tax-exempt triple-A general obligation bonds were at 107.8% of the comparable London Interbank Offered Rate.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, said buyers stretching for yield and mutual funds looking to put massive new inflows to work resulted in a "strong rally in longer-maturity and lower-rated bond prices" last week.
"Because much of the market's improvement has appeared to follow structural buying patterns — on a leverage-amplified imbalance between supply and demand — there is some systemic risk of reversal, creating challenges for investors looking to buy bonds now," Fabian wrote.
"On the other hand, at least some of the improvements can be chalked up to our sector's gradual replacement of bond insurance with credit intelligence and, perhaps more importantly, a long-term increase in retail investment as exploding federal deficits make looming tax increases appear ever closer. High-grade tax-exempt yields appear to be pinned at very low nominal levels, with even a slight backup in price likely to evoke support from buyers."
"Meanwhile," Fabian said, "the Federal Reserve is indicating that banks are less worried about their municipal holdings, even as the risk of credit events increases. We still expect that, at some point, safe sector issuers will begin to miss debt-service payments, but so far it is the risky sector credits that have filed notices of trouble."
The bulge of billion-dollar deals in the market in recent months due to the flood of Build America Bond issuance since April will fall away this week as volume slows to an estimated $2.49 billion leading into the Labor Day holiday, according to Ipreo LLC and The Bond Buyer.
The largest deal headed to market this week is expected to be a $375 million offering of water revenue bonds from the San Francisco Public Utilities Commission. The issue, which is slated for competitive bidding today, will carry ratings of A1 from Moody's Investors Service and AA-minus from Standard & Poor's and will be structured to mature from 2011 to 2039.
In the new-issue market yesterday, RBC Capital Markets priced $79.1 million of state highway capital improvement revenue bonds for the Oklahoma Capitol Improvement Authority. The bonds mature from 2010 through 2018, with yields ranging from 1.16% with a 2% coupon in 2011 to 3.31% with a 4% coupon in 2018. Bonds maturing in 2010 were decided via sealed bid. The bonds, which are not callable, are rated AA by Standard & Poor's and AA-minus by Fitch Ratings.
Southwest Securities priced $29.5 million of unlimited-tax bonds for Texas' La Porte Independent School District. The bonds mature from 2011 through 2031, with yields ranging from 0.95% with a 3% coupon in 2011 to 4.70% with a 4.5% coupon in 2031. The bonds, which are callable at par in 2018, are rated Aa3 by Moody's and AA by Standard & Poor's.
In a weekly report, Guy LeBas, fixed-income strategist at Janney Montgomery Scott LLC, wrote: "After nearly two years of disappointing economic activity led by the consumer and later corporate-credit unwind, the great recession is almost certainly now behind us."
"That pronouncement, bold as it may sound, is nothing particularly surprising, as hopes about improving economic activity began to blossom as early as March of this year," he added. "Still, calling an end to a seeming economic era is nothing compared to forecasting what's to come. We believe that a stabilization of inventory levels, improvements in corporate investment, and a dead-cat bounce from residential construction activity will serve to drag GDP growth back to positive territory in the third quarter.
"Notice that one major factor was lacking from that list: consumer spending," LeBas said. "After the weak July monthly incomes and outlays data, it's clear that consumer spending that was once blocked by a lack of credit availability will remain stymied by weaker income levels heading into the second half of 2009. Considering that consumer activity accounts for more than 70% of total output, in order to have legs, and recovery will need significant consumer participation; as a result, we'll be very focused on the holiday selling season for a potential consumer rebound that would signal a return to a sustained — albeit lower — level of long-term growth."
In economic data released yesterday, the Chicago Purchasing Managers' Business Barometer rose to 50.0 in August from 43.4 in July. Economists polled by Thomson Reuters predicted a 47.8 reading for the indicator.