The municipal market steered its own course Monday, concerned with its own technicals and indicators.
The market cast an eye toward the events in Europe and their subsequent effect on the U.S. stock and bond markets, but didn’t care enough about developments overseas to follow Treasury yields up and down throughout the day’s session.
So while Treasuries started the day weaker only to recover in the afternoon, muni yields outperformed modestly by firming a couple of basis points at most.
The muni market, however, followed closely the week’s biggest bond issuance, a $550 million deal that the New York City Transitional Finance Authority issued Monday for retail investors.
Muni yields concluded the day’s session firmer across all but the front of the curve, according to the Municipal Market Data scale. They were steady out through five years. Thereafter, they were one or two basis points lower.
The benchmark 10-year yield ended Monday down one basis point to 2.17%.
The two-year yield held steady at 0.39% for a third consecutive session. The 30-year yield dropped two basis points to 3.81%.
Munis saw no selling pressure throughout the day, MMD analyst Randy Smolik wrote in a research post.
Many offerings remained high after Friday’s enthusiastic buying, he wrote. And bids in the secondary “were willing to step if encouraged.”
“Throughout the session, selling pressure failed to materialize in the muni secondary,” Smolik wrote. “Buyers were lingering around generic curve levels but were frustrated by the limited market offerings.”
Treasuries spent much of the day projecting a weaker tone across the curve. By the end of the day, though, the market recovered after Standard & Poor’s placed several countries representing Europe’s largest, and in some cases steadiest, economies on watch with negative implications. They included Austria, Finland, Germany, Luxembourg, and the Netherlands.
The benchmark 10-year yield ended the day flat at 2.04%. The two-year yield also was unchanged at 0.26%. The 30-year yield inched up one basis point to 3.03%.
Traders were of two minds regarding investor demand in the market. Some argue that investors are getting desperate to buy and put money to work, as well as lock in yields that may remain low in 2012.
Others, though, acknowledged that the market is tight, but investors are still willing to wait and pick their spots.
Investors may be starved for a specific name or for paper, in general, a trader in New York said. But that becomes a problem, he added, as there’s not a lot of paper out there.
But even in this environment, new issuance alone won’t be sufficient to lure investors. Those who have waited this long to buy can wait longer, the trader said.
“It’s not necessarily because it’s a new issue that they’re going to come out of the woodwork and buy,” he said.
Primary market volume should remain near the $6 billion range this week. Industry estimates for anticipated market volume total $5.82 billion, against a revised $5.88 billion last week. But there are no mega deals expected.
The supply that has arrived lately has been manageable. Market participants appear to have money and be spending in the primary market, traders said.
Morgan Stanley kicked off the week for the negotiated market as it priced for retail $550 million of New York City TFA building aid revenue bonds. The bonds were rated Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s and Fitch Ratings.
Yields range from 0.92% with a 2.00% coupon in 2014 to 4.55% with a 4.50% coupon in 2041. Debt maturing in 2013 was offered in a sealed bid.
Credits maturing in 2023 through 2027 and in 2032, 2033, and 2037 were not offered for retail.
A second retail offer period is expected Tuesday; institutional investors should have a shot at the bonds starting Wednesday.
The New York market will likely be watching the deal closely, a trader from New Jersey said, as it is expected to reprice comparable credits. And the deal reaches a market that has recently grown hungry to put money to work.
On the plus side, the TFA is a decent-trading name, a trader in New York said. The coupons arrived mixed, he added.
“It’s pick and choose your maturities,” the trader said. “The coupons are a little big for some retail investors on some ends. And then on some, it’s not so bad. Overall, I think they’ll do OK on the deal. There are a few maturities on the longer end that look attractive, that people will jump on. That’s a good sign.” The city was not able to respond by press time.
Siebert, Brandford Shank & Co. priced $387 million of DeKalb County, Ga., second-resolution water and sewer revenue bonds. The bonds are rated Aa3 by Moody’s and A-plus by Standard & Poor’s.
Yields range from 1.04% with coupons of 2.00% and 4.00% in a split maturity in 2014 to 4.72% with a 5.25% coupon in 2041. At repricing, yields fell between two and five basis points throughout the curve.
Citi analysts in a research report recognize how investors are showing negative demand for long-term debt, resulting in an increase in the 10-year to 30-year slope.
“The key reason for this shift appear to be strong demand for intermediates from investors extending out from cash or short maturities, even as the long end continues to suffer from a lack of natural buyers,” Citi analysts, led by George Friedlander, wrote. “As tax-exempt supply rebounded in October and November, the long end has been hard pressed to handle the extra volume without moving toward higher yields.
