The municipal market was slightly firmer Tuesday amid light to moderate secondary trading activity.
"We're maybe two or three basis points better right now," a trader in New York said. "Treasuries are better and we're following. There isn't a ton of activity in the secondary, but there are some bits and pieces trading. There just isn't any supply testing these levels and that really isn't changing this week."
The Municipal Market Data triple-A 10-year scale fell five basis points Tuesday to 3.11%, the 20-year dipped six basis points to 4.36%, and the scale for 30-year bonds declined three basis points to 4.73%.
"There was definitely a stronger tone to the market today," a trader in Los Angeles said. "The activity was somewhat muted coming off a three-day weekend, but we were up maybe three, four basis points in spots."
Tuesday's triple-A muni scale in 10 years was at 89.9% of comparable Treasuries and 30-year munis were at 102.6%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 108.2% of the comparable London Interbank Offered Rate.
"Muni flows were light today," wrote Randy Smolik in the daily MMD commentary. "Some would suggest it was mostly due to a thinly offered secondary. The long holiday weekend and school vacation week for most of the Northeast could have kept follow-through modest as well. But even where there were large blocks, we saw performance that was well behind Treasuries today."
Treasuries showed gains Tuesday. The benchmark 10-year note was quoted recently at 3.45% after opening at 3.58%. The 30-year bond was quoted at 4.60% after opening at 4.68%. The two-year note was quoted at 0.69% after opening at 0.75%.
The Treasury Department Tuesday auctioned $35 billion of two-year notes with a 5/8% coupon at a 0.745% yield, a price of 99.76. The bid-to-cover ratio was 3.03%. Federal Reserve banks also bought $1.92 billion for their own account in exchange for maturing securities.
Illinois' $3.7 billion GO issue that was postponed last week will return to the calendar this week, the highlight of an otherwise bleak primary market.
Issuers and underwriters are keeping new issuance to a minimum in light of Presidents Day and expectations that many investors are preoccupied with winter-break vacation plans. Ipreo LLC and The Bond Buyer expect an estimated $5.44 billion of long-term new issues will be priced this week, about $2.5 billion short of the typical $8 billion.
The light volume comes on the heels of a revised $3.39 billion that entered the market last week, according to Thomson Reuters.
The taxable Illinois deal will be priced Tuesday and Wednesday by joint book-runners Morgan Stanley and Loop Capital Markets LLC.
The deal, originally scheduled for last Thursday, was postponed after officials decided to give investors time to digest Gov. Pat Quinn's new budget proposal that was released last Wednesday.
The budget includes deep cuts and increased borrowing to pay off a backlog of bills.
The state could face a deficit as high as $15 billion by the end of fiscal 2011, according to officials. The bond proceeds will fund the state's fiscal 2011 pension fund contributions.
The bonds will mature from 2014 to 2019 and are rated A1 by Moody's Investors Service, A-plus by Standard & Poor's, and A by Fitch Ratings.
Houston is planning to sell $280.9 million of first-lien combined utility system revenue refunding bonds on Wednesday. Rice Financial is set to price the deal with a structure of bonds maturing from 2027 to 2031 with a term bond in 2033. The bonds are expected to be rated AA by Standard & Poor's and AA-minus by Fitch.
The Kentucky Asset/Liability Commission is set to issue $269.7 million of taxable funding notes in a negotiated deal by JPMorgan on Wednesday.
The deal is tentatively structured to mature serially from 2012 to 2022 and ratings are expected to be Aa2 from Moody's, A-plus from Standard & Poor's, and AA-minus from Fitch.
Proceeds will refinance loans Kentucky obtained from the teacher's pension fund to pay the state's share of promised medical benefits. The loans carried 7.5% interest rates and the note sale will lower financing costs.
In a weekly report, George Friedlander, a municipal strategist at Citi, wrote that the underlying strength in the tax-exempt bond market has improved dramatically in recent weeks.
"Several factors have caused the improvement, perhaps most importantly the realization that new-issue supply is likely to stay light until at least April, which induced some dealers and investors to buy more aggressively this week," Friedlander wrote. "Many states are in the process of making wrenching cuts to balance their budgets, and-or hardening their negotiating stance with civil service unions and-or raising taxes.
"What we expect to become clearer as this process continues is just how few actual bond defaults are likely to result," he said. "As this occurs, we expect household sector demand — funds and direct retail — to pick up. The question, then, is whether it picks up enough to handle a heavier calendar of medium-quality paper, once that finally arrives. At this point, it is difficult to tell, although some revenue bond sectors have not rallied nearly as robustly as high-grade GOs. We still like longer-term high-grades but are also willing to wait for more volume for a portion of assets, particularly on medium-quality paper."
In economic data released Tuesday, the consumer confidence index gained to 70.4 in February from an upwardly revised 64.8 last month. Economists polled by Thomson Reuters predicted the index would be 65.0.
