The municipal market was quiet and unchanged during yesterday's abbreviated session ahead of the Veterans Day close.
"There's not a whole lot going on right now, and I don't anticipate that changing much," a trader in New York said. "We're out of here early today, and the market's closed tomorrow, so I don't think you're going to be seeing a whole lot of things moving until Wednesday at the earliest."
Trades reported by the Municipal Securities Rulemaking Board yesterday showed little movement. Bonds from an interdealer trade of California 5s of 2025 yielded 5.38%, even with where they were sold Friday. Bonds from an interdealer trade of Washington 5s of 2033 yielded 5.28%, even with where they traded Friday. Bonds from an interdealer trade of Port Authority of New York and New Jersey 5s of 2028 yielded 5.19%, even with where they traded Friday.
The Treasury market showed some gains. The yield on the benchmark 10-year Treasury note, which opened at 3.80%, finished at 3.75%. The yield on the two-year note was quoted near the end of the session at 1.25% after opening at 1.32%. The yield on the 30-year bond, which opened at 4.27%, was quoted near the end of the session at 4.20%.
Amid continued strong demand and recent firmness that saw some yields decline as much as 12 basis points in spots during new-issue pricing last week, a $750 million revenue offering from the New Jersey Transportation Trust Fund Authority will further test the strength of the market this week.
The deal from the Garden State is the largest on the calendar and will come to market in an abbreviated trading week as a result of today's Veterans' Day observance and the early close yesterday. The deal is part of an estimated $4.84 billion of total combined new-issue volume expected this week: $4.56 billion in negotiated sales and an estimated $286.4 million in competitive sales, according to Thomson Reuters. That is a slight increase from last week when the market saw a revised $3.83 billion in total negotiated sales and $222.6 million in total competitive sales.
The New Jersey deal is planned for pricing on Thursday following a retail order period tomorrow by senior book-runner Merrill Lynch & Co. The deal will be comprised of $500 million of current interest bonds and $250 million of capital appreciation bonds, but the exact structure was still being decided at press time. Moody's Investors Service rates the bonds A1, Standard & Poor's rates them AA-minus, and Fitch Ratings rates them A-plus.
Also in the Northeast, the Dormitory Authority of the State of New York is planning to issue $659.9 million of state personal income tax bonds in a three-pronged deal being senior-managed by Morgan Stanley and priced on Thursday. The deal is comprised of Series 2008B bonds for education purposes, Series 2008C tax-exempt bonds, also for education purposes, and a Series 2008C taxable component for economic development and housing projects. The bonds will carry ratings of AAA from Standard & Poor's and AA-minus from Fitch.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote that institutional demand "remains uncertain."
"While trader reports note that institutional buying has been thin - e.g., cherry picking - long maturity munis are being evaluated very aggressively versus MMA's consensus," Fabian wrote. "This implies a more than moderate risk of a sell-off should issuer supply increase. However, we also expect that demand has been stronger than widely believed."
On the other hand, Fabian continued, institutional demand "from non-financial corporations and arbitrage-oriented accounts is likely to remain very weak."
"In particular, we note the fast-evolving news on AIG, a pre-crisis holder of $50 to 60 billion in muni bonds. As that company's future profit prospects have eroded, so has its likely interest in owning such an enormous portfolio of munis," he wrote. "Limited selling in the recent rally has reportedly occurred, but we continue to see risk of more aggressive liquidations should asset sales or bailout-related restructurings accelerate. This is a vector that we feel is impossible to predict with any certainty; participants should thus be cautious when positioning longer-term bonds in the coming months."
The economic calendar was light yesterday, kicking off a week that will be generally thin on economic data. No major data will be released until Thursday, when initial jobless claims for the week ended Nov. 8 and continuing jobless claims for the week ended Nov. 1 will be released. On Friday, October import prices and October retail sales will be released, along with the preliminary November University of Michigan consumer sentiment index, September business inventories, and September business sales.
Economists polled by Thomson Reuters are predicting 482,000 initial jobless claims, 3.850 million continuing jobless claims, a 4.2% drop in import prices, a 1.9% dip in retail sales, a 1.0% decline in retail sales excluding autos, a 56.0 University of Michigan sentiment index, and no change in business inventories.
However, next week, a larger slate of economic data will be released, starting Nov. 17, with October industrial production and October capacity utilization. On Nov. 18, the October producer price index will be released, followed by October consumer price index, October housing starts, and building permits on Nov. 19. Finally, on Nov. 20, initial jobless claims for the week ended Nov. 15 will be released, along with continuing jobless claims for the week ended Nov. 8 and the October index of leading economic indicators.
Economists polled by Thomson Reuters are predicting a 0.5% dip in industrial production, 76.1% capacity utilization, a 1.0% decline in PPI, a 0.2% rise in PPI core, a 0.4% drop in CPI, a 0.2% uptick in core CPI, 800,000 housing starts, and 783,000 building permits. They are not yet projecting next week's initial jobless claims and continuing jobless claims.