The municipal market was unchanged yesterday ahead of a heavy slate of new issuance set to hit the primary market later this week, including a $750 sale of taxable Build America Bonds for California scheduled for today, which the state announced yesterday.
“It’s pretty quiet right now,” a trader in New York said. “It looks like it’s going to be another new-issue week. People are going to have their eyes on the primary again. Right now, though, in the secondary, there is some business getting done, but there is no movement I’m seeing. Just pretty unchanged overall.”
“We’re pretty flat,” a trader in Los Angeles said. “Some bits and pieces out in the secondary, but there’s not too much to speak of. People are just looking ahead to the big calendar out there, seems to be a lot of stuff out there, especially in the Cal market. But, for today, not much going on.”
The Treasury market showed losses yesterday. The yield on the benchmark 10-year note opened at 3.38% and finished at 3.40%. The yield on the two-year note opened at 0.89% and finished at 0.92%. The yield on the 30-year bond finished at 4.24%, after opening at 4.22%.
Yesterday’s Municipal Market Data triple-A scale yielded 3.03% in 10 years and 3.82% in 20 years, matching levels of 3.03% and 3.82%, respectively, Friday. The scale yielded 4.23% in 30 years yesterday, matching Friday’s level of 4.23%.
As of Friday’s close, the triple-A muni scale in 10 years was at 88.6% of comparable Treasuries, according to MMD, and 30-year munis were 99.1% of comparable Treasuries. Meanwhile, 30-year tax-exempt triple-A rated general obligation bonds were at 102.7% of the comparable London Interbank Offered Rate.
The California market again takes center stage — this time with a $1.5 billion sale of general obligation bonds catering to retail investors.
E.J. De La Rosa & Co. plans to offer the bonds to individual investors during a one-day retail order period today, followed by an official pricing for institutions tomorrow. The new-money bonds are structured to mature from 2032 to 2039 and will finance various capital improvement projects within the state. California’s GO debt is currently rated Baa1 by Moody’s Investors Service, A by Standard & Poor’s, and BBB by Fitch Ratings.
Additionally, the state announced yesterday a $750 million sale of BABs to be priced by Citi today. Tom Dresslar, spokesman for state Treasurer Bill Lockyer, wrote in an e-mail that the state will sell the BABs “based on an inquiry the state received.” The proceeds will finance infrastructure projects.
The issues will arrive on the heels of two mammoth $1 billion-plus California offerings that dominated market activity last week.
In other sizable activity this week, Goldman, Sachs & Co. will bring a $700 million Georgia GO sale structured with a majority of taxable BABs. Rated natural triple-A by all three major rating agencies, the GOs will consist of four series of bonds, portions of which will be priced on two separate days. The tax-exempt series, consisting of $85.4 million in Series 2009 F maturing from 2010 to 2014, $114.5 million in Series 2009 G maturing from 2010 to 2029, and $100 million in the Series 2009 I refunding maturing from 2010 to 2023 will be priced today. The $400 million taxable, direct-pay BAB Series 2009 H — which is structured to mature from 2010 to 2029 — will price tomorrow.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote, “we remain generally positive on the municipal market, although long yields continue to appear somewhat too low and there is a clear vulnerability to incremental supply.”
“There is also the risk that last week, as the final week in many participants’ fiscal year, may not honestly represent the strength of buyer demand,” Fabian wrote. “Still, this market has been able to put away large amounts of new loans without capitulating much beyond the boundaries set in mid-October. And, by more widely depending on higher yields to attract demand from individual investors, there is limited risk of more dramatic losses to high grades.
“High-yield paper may be more delicately balanced as demand monotonically relies on high yield funds — a reversal of inflows from these could create a demand vacuum and force yields much higher,” he continued. “This week, another large new issue calendar, led by an under-loved state of California GO, could keep things illiquid and difficult, in particular as signs from the taxable market — where a wealth of economic data may roil prices up or down — will likely be inconsistent.”
In another weekly report, George Friedlander, muni strategist at Morgan Stanley Smith Barney, said “issues are being priced to sell, as dealers and traders attempt to keep inventory down.”
“The muni dealer community has had an excellent first nine months, as yields dropped sharply from crisis highs in late December,” he wrote. “So, they are apparently being told to be cautious in their block positioning, under instructions not to 'mess up’ the very strong results for the first three quarters. Compounding this pattern is continuing frustration and concern about how difficult it is to hedge specific muni market positions. In corporates, traders who want to take their net positions down have the luxury of shorting credit-default swaps instead of simply selling their existing inventories. There is no similar hedging opportunity in munis. The bottom line is that the muni market has become much more thinly traded, volatile, and block size-sensitive in recent weeks.”
In economic data released yesterday, construction spending unexpectedly rose 0.8% in September to a seasonally adjusted annual rate of $940.3 billion. Economists estimated construction spending would fall 0.2% in September, according to the median estimate from Thomson Reuters.
