The municipal market was unchanged to slightly firmer yesterday. Traders said tax-exempt yields were flat to lower by one or two basis points.
The market to this point has shown little reaction to the House passing the Senate-approved version of the federal government's much-discussed $700 billion bailout plan for Wall Street. The House approved and President Bush signed the measure into law Friday afternoon. The House earlier voted down a previous version of the rescue package.
"People are just trying to get a handle on things at this point. Things aren't fundamentally different than where they were Friday," a trader in New York said. "It's going to take some time for that bailout plan to kick in, but right now, there's just not much movement. There's a little bit of firmness out there, but you could call it unchanged for the most part."
Trades reported by the Municipal Securities Rulemaking Board showed some gains. A dealer sold to a customer New York State Urban Development Corp. 5s of 2032 at 5.35%, down one basis point from where they were sold Friday. Bonds from an interdealer trade of New York City 5s of 2025 yielded 5.64%, one basis point lower than where they traded Friday. Bonds from an interdealer trade of Massachusetts Health & Education Facilities Authority 5s of 2038 yielded 5.18%, one basis point lower than where they traded Friday. Bonds from an interdealer trade of California 5.25s of 2036 yielded 5.62%, down one basis point from where they were sold Friday. A dealer sold to a customer District of Columbia Water and Sewer Authority 5s of 2036 at 5.70%, even with where they traded Friday.
"We saw some sizeable gains in Treasuries, but we didn't care about that so much in the muni market," a trader in San Francisco said. "Not much movement in our market as a lot of people remain hesitant and continue to take a wait-and-see approach."
The Treasury market showed gains yesterday, as the Dow Jones industrial average plummeted, at one point dropping 800 points. It finished the session down 315. The yield on the benchmark 10-year Treasury note, which opened at 3.60%, was quoted near the end of the session at 3.46%. The yield on the two-year note opened at 1.58%, and was quoted near the end of the session at 1.43%. And the 30-year Treasury bond, which opened at 4.08%, was quoted near the end of the session at 3.98%.
"This is a crucial week," Matt Fabian, managing director at Municipal Market Advisors, wrote in a weekly report. "The start of a new month and passage of the Treasury's bank bailout plan have brought a slightly better context to the municipal market, and yields may continue to run lower over the next few days. However, longer-term fundamentals - i.e., fewer dealers, smaller institutional demand, large supply, evolution of the short-term market, rating pressure on the bond insurers, weakening issuer credit trends, and poor correlation with the broader fixed-income markets - remain highly challenging and are unlikely to correct much by year-end."
However, Fabian wrote this week could "provide a reasonable guide to future success as the money funds and their investors will need to decide if credit difficulties for [Dexia SA/Financial Security Assurance Inc. and Hypo Real Estate/Depfa Bank PLC] are scary enough to force another round of selling, and as issuers look bring a modest calendar of new loans for the first time in weeks. We believe the market can and should clear both of these hurdles, but investors should also remain cautious as setbacks could drive another round of weakness."
George Friedlander, managing director and fixed-income strategist at Citi, wrote in a weekly report that "muni market liquidity has been badly damaged in the aftermath of recent events on Wall Street."
"In our view, the factors that have led to the current massive underperformance of Treasuries can be divided into six muni-related categories, along with the huge flight to quality that has depressed yields all along the Treasury yield curve and pushed them up elsewhere, and overall illiquidity, which is putting pressure on all non-Treasury components of the fixed-income market," he wrote. "Some of the factors pressuring the muni market could reverse, to a degree, with the federal bailout plan successfully shepherded through Congress."
"Nevertheless, we suspect that many of these patterns will take substantial time to reverse. In the meantime, muni yields are likely to remain distended - good news, we think, for investors with cash to put to work, but this is also a time when exercising caution remains appropriate," Friedlander wrote.
Volume will remain significantly diminished from its usual pace, with total new issuance estimated at just $1.26 billion this week, compared with a revised $1 billion last week, according to Thomson Reuters. This week's negotiated volume is estimated at $888.6 million, slightly less than last week's revised $888.8 million, while competitive sales are estimated at $370.6 million, up from $117.7 million last week.
In the competitive market, a $750 million Massachusetts general obligation revenue anticipation note deal, which was postponed last Wednesday, is scheduled for pricing today. The deal includes two series of $375 million of the notes, which are sold to help the state with cash flow needs prior to the Treasury Department collecting federal reimbursements and income tax receipts.
Massachusetts is in discussions with the U.S. Treasury regarding whether it could borrow money from the federal government in the future. As of yesterday afternoon, Bay State officials were still planning on selling $750 million of notes after postponing the deal last week.
"The Massachusetts state Treasury and the U.S. Treasury are in talks to explore whether, if necessary, the U.S. Treasury or the Federal Reserve would be a lender of last resort," said Treasury spokeswoman Francy Ronayne.
In the new-issue market yesterday, Wachovia Bank NA priced $100.1 million of bonds for the Maine Municipal Bond Bank. The bonds mature from 2009 through 2028, with a term bond in 2038. Yields range from 2.38% with a 4% coupon in 2009 to 5.53% with a 5.5% coupon in 2038. The bonds, which are callable at par in 2018, are rated Aa1 by Moody's Investors Service and AAA by Standard & Poor's and Fitch Ratings.
The economic calendar was light yesterday.