The municipal market was largely unchanged yesterday.
"It's very, very quiet. You have a pretty decent calendar, so everyone's just waiting to see how that's moving through the system and will get priced," a trader in Chicago said. "It was a little weaker in the morning, but now it just seems like everybody is waiting."
The Treasury market was mixed yesterday. The yield on the benchmark 10-year Treasury note, which opened at 4.09%, finished at 4.07%. The yield on the two-year note was quoted near the end of the session at 2.65% after opening at 2.63%.
"It's quiet, but there's some retail business getting done," a trader in San Francisco said. "But it's pretty much flat on the day. Just hanging in there."
In economic data released yesterday, the composite index of leading economic indicators slid 0.1% in June, after decreasing a revised 0.2% in May. LEI stands at 101.7. Economists polled by IFR Markets predicted it would be off 0.1% in the month.
In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, said that, although long-term high-grade muni yields as a percentage of Treasury yields are only at the midpoint of the range for the past 12 months, "these are not unattractive levels, in our view, particularly given the steep slope of the muni curve."
"In addition, as described, these benchmarks generally understate the increase in yields for the market as a whole, as bonds not meeting the precise needs of a limited number of institutional investors have to yield more in comparison with benchmarks than they did in the past," Friedlander wrote. "On top of this, pricing of blocks in the primary and secondary markets has become extremely erratic and in some cases, irrational. In our opinion, investors who keep their eyes and ears open, and are a bit flexible in terms of bond purchase parameters, can pick up paper that is far more attractive than the benchmarks suggest."
In addition, Matt Fabian, managing director at Municipal Market Advisors, in a report said that the tax-exempt market "continues to be tested by inside and outside sources of instability."
"Last week, the Treasury's plan for supporting Fannie Mae and Freddie Mac did not initially push yields higher as widely expected; instead, participants began the week apparently more concerned over projected corporate earnings and taxable yields fell," Fabian wrote. "Munis also saw limited gains, but, without substantial liquidity or demand pressure at bubble-like price levels for high grade paper, our sector lagged substantially. By midweek, Treasuries began to sell off in the face of substantially higher inflation readings, better-than-expected earnings by [Citi and JPMorgan], and worsening near-term supply concerns as the current crisis demands more bailout cash while driving the Federal budget further out of balance."
Fabian wrote that the "muni market was happy to follow along here, although earlier maturities continued to see small gains."
"This area of the curve is still recovering from the dilutive effects of second quarter 2008 auction-rate securities refunding supply while also benefitting from stronger bidding from individuals, crossover investors, and perhaps traditional investors now reallocating shorter on the yield curve to fight inflation and realize gains elsewhere," he wrote. "Still, last week's net effect on our sector was negative, with particularly sharp corrections in longer maturities on Thursday and Friday.
A pair of issuers from Los Angeles will have starring roles in this week's primary market, which is expected to see an estimated $7.67 billion of new-issue volume, according to Thomson Reuters, compared with a revised $6.27 billion last week.
The larger of the two is a $905.1 million financing for Los Angeles International Airport, one of the country's busiest, while the other deal is a $500 million school note deal.
The Los Angeles Department of Airports will bring a four-pronged deal - a portion of which is subject to the alternative minimum tax - tomorrow, after a retail order period today led by senior book-runner Goldman, Sachs & Co.
The largest portion of the LAX deal consists of $613.3 million of Series 2008A senior revenue bonds subject to the AMT, while Series 2008B is a refunding of senior revenue bonds that totals $8 million and is also subject to the AMT. Series 2008C consists of $250.1 million of non-AMT subordinate revenue bonds, followed by Series 2008 D, which totals $33.7 million of non-AMT subordinate revenue refunding bonds.
The LAX senior bonds are rated Aa3 by Moody's Investors Service and AA by Standard & Poor's and Fitch Ratings, while the subordinate bonds are rated A1 by Moody's and AA-minus by Standard & Poor's and Fitch.
The Los Angeles Unified School District will sell $500 million of tax and revenue anticipation notes tomorrow in a negotiated deal being priced by Banc of America Securities LLC. The one-year notes are rated SP-1-plus.
Activity in the new-issue market was fairly light yesterday.