The municipal market was quiet and largely unchanged yesterday following last week's volatility, as investors largely manned the sidelines in advance of the Christmas holiday later this week.
"It's pretty quiet now," a trader in New York said. "After the rallying we saw last week, I think everyone is just ready for the holidays at this point. There's nothing out there on the new-issue calendar, and really, for all intents and purposes one more trading day this week, which is tomorrow, so people are just on the sidelines getting ready for the holidays."
"There may be a little bit of firmness out there still, but I don't think there's enough activity out there to really move the scale," a trader in San Francisco said. "So a firmer tone, and maybe a basis point or two better in spots, but overall we're basically unchanged, and I'd imagine it'll be more of the same tomorrow."
The Treasury market showed some losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.12%, was quoted near the end of the session at 2.14%. The yield on the two-year note was quoted near the end of the session at 0.79% after opening at 0.74%. The yield on the 30-year bond, which opened at 2.56%, was quoted near the end of the session at 2.59%.
The Treasury Department yesterday auctioned $38 billion of two-year notes with a 7/8% coupon at a 0.922% yield, a price of about 99.91. The bid-to-cover ratio was 2.13. Federal Reserve banks also bought about $2.8 billion for their own account in exchange for maturing securities.
Matt Fabian, managing director at Municipal Market Advisors, wrote in a report that last week, "muni bonds rallied as accounts bought bonds both to position for resale into an expected rally in January and, as permitted by thinmarket-trading conditions, induce stronger marks in broader portfolio evaluations for year-end."
"Because lower-rated, risky sector paper participated only weakly, the rally likely does not imply a systematic return of institutional investors, and is thus temporary," he wrote. "There are only four full trading days over the next two weeks; prices are likely biased slightly higher at least until January. However, the surge of primary supply in the first quarter of 2009, if not offset by an aggressive federal stimulus program that directly preempts immediate bond sales, presents a major challenge to performance."
"Similarly," Fabian said, "many issuers' growing need to borrow for budget deficits - most notably Puerto Rico -will increase supply pressures. To the upside, the very low Treasury yields may be encouraging more accounts there to take gains and swap into higher-yielding spread paper like munis and investment-grade corporates."
George Friedlander, managing director and fixed-income strategist at Citi, wrote in his weekly report that the muni market now is a "very different environment from mid-2003, when deflation concerns were last in the air, and there was talk of 'macro easing' by the Fed that included nontraditional methods, in addition to reducing Fed funds."
"At that time, while inflation was slowing to a puzzling degree, the broader economic environment was benign," he wrote. "Profits and profit margins were rising, and job growth was poised to rebound sharply. Now, the exact opposite patterns are at work: profit expectations are dropping sharply, unemployment could be headed for double digits, and the economy in the fourth quarter is contracting at a 6% annual rate. As a consequence, there is little risk that policymakers will signal that 'we were only fooling' any time soon, and let long-term Treasury yields rebound. Much is still to be done to sustain the tentative improvements in credit conditions and long-term interest rates."
With the Christmas holiday arriving later this week, a year-end lull has settled over the muni market that is likely to last at least until the second week of January as the market puts what has become one of the most eventful and tumultuous years behind it.
There are no sizable deals scheduled for sale in either the negotiated or competitive markets this week - or next week, when the municipal market prepares to ring in the New Year. According to Thomson Reuters, this week there is an estimated $6.6 million in total new-issue volume expected, versus a revised $3.07 billion last week when the largest negotiated deal was a $100 million general obligation sale from Philadelphia with an underlying rating of Baa1 by Moody's Investors Service, BBB by Standard & Poor's, and BBB-plus by Fitch Ratings.
The only issue listed on the negotiated calendar, compiled by Ipreo, for this week is a $2.5 million capital improvement offering from the Cherokee County, Okla., Rural Water District No. 3 senior-managed by Oklahoma City-based Wells Nelson & Associates LLC.
The economic calendar was light yesterday. However, over today and tomorrow a slate of economic data will be released ahead of the Christmas holiday. Today, the final third-quarter gross domestic product will be released, as will the final December University of Michigan consumer sentiment index, November existing home sales, and November new home sales.
Tomorrow, initial jobless claims for the week ended Dec. 13 will be released, along with continuing jobless claims for the week ended Dec. 7, November personal income, consumption, the core personal consumption expenditures deflator, and the November durable goods report.
Economists polled by Thomson Reuters are predicting a 0.5% drop in GDP, a 58.6 reading for the Michigan sentiment index, 4.900 million existing home sales, 420,000 new home sales, 558,000 initial jobless claims, 4.400 million continuing jobless claims, no change in personal income, a 0.7% dip in personal consumption, no change to the core PCE deflator, a 3.0% decline in durable goods, and a 3.0% drop in durable goods excluding transportation.
