The municipal market was unchanged to slightly firmer yesterday, kicking off a week likely to be dominated by Build America Bond issuance in the primary market. Traders said tax-exempt yields were flat to lower by one or two basis points.
"We're a little better, mostly out long," a trader in New York said. "I'd still say we're relatively flat on the whole, but there is some firmness out there. It's still pretty quiet, just because a lot of people are on vacation; it's that time of year. Some business is getting done, but there are just less people around, which is to be expected. But it feels a little better out there."
"It looks like BABs will be the story again this week, out here especially," a trader in Los Angeles said. "We have that big University of California deal coming, and there will be a lot of interest in that. As for today though, I'd say we're firmer a basis point or two through most of the curve. Maybe it's flat in spots, but I'd say closer to one or two better than flat."
The Treasury market showed some gains yesterday against a backdrop of selling in equities, as the Dow Jones Industrial Average fell 186.06 or 2%. The yield on the benchmark 10-year Treasury note, which opened at 3.57%, was quoted near the end of the session at 3.47%. The yield on the two-year note finished at 1.02%, after opening at 1.05%. And the yield on the 30-year bond, which opened at 4.42%, was quoted near the end of the session at 4.32%.
As of Friday's close, the triple-A muni scale in 10 years was at 84.5% of comparable Treasuries, according to Municipal Market Data. Additionally, 30-year munis were 104.1% of comparable Treasuries. Also, as of Friday's close, 30-year tax-exempt triple-A rated general obligation bonds were at 108.5% of the comparable London Interbank Offered Rate.
Also, the Municipal Securities Rulemaking Board's real-time transaction reporting system and its short-term obligation rate transparency system were offline for several hours Monday morning, due to "an outage in the underlying infrastructure that supports the systems," the MSRB said in an e-mail. The systems went offline at 7:30 a.m. Eastern Daylight Time, and its short-term system was restored at 11:30 a.m., while the real-time system was restored at 1 p.m.
In a weekly report, Phil Fischer, head of municipal strategy at Bank of America-Merrill Lynch, said that last week, "the muni curve was relatively unchanged … as the market absorbed a heavy primary calendar."
"The short serial part of the curve finally showed some cheapening as the five-year ratio bounced off its low of 60% last Friday to around 68%," he wrote. "Technical support remains extremely strong even in the face of a large expected supply from California."
Also, Fischer wrote that issuance of BABs "has been steady as the breadth of BAB buyers continues to grow. BABs rallied this week along with taxables. BABs also outperformed their tax-exempt counterparts this week driving ratios of BAB yields to corresponding tax-exempts up."
The municipal market will get another significant dose of BABs this week when more than $2 billion of the taxable securities are expected to arrive in the primary market as part of an estimated $7.26 billion in total new-issue volume, according to Ipreo LLC and The Bond Buyer.
Only $649.5 million of the anticipated volume consists of competitive sales, while the remaining $6.613 billion is negotiated. The estimate is slightly lower than last week's actual revised $8.78 billion slate, according to Thomson Reuters.
This week, the University of California will deliver the largest BAB sale of the week when it sells $1.04 billion of general revenue BABs as part of a $1.37 billion deal. The remainder of the deal consists of $325 million of tax-exempt general revenue bonds. With ratings of Aa1 by Moody's Investors Service and AA by Standard & Poor's, the bonds will be priced by Barclays Capital tomorrow after a retail order period today.
In the Southwest, the Texas Department of Transportation will bring to market $1.1 billion of Texas GO mobility fund BABs in a Merrill Lynch & Co.-led deal scheduled for pricing tomorrow. The bonds are rated Aa1 by Moody's, and AA-plus by both Standard & Poor's and Fitch Ratings. They will be structured with taxable, direct-pay BABs due in 2029 and 2039.
The Dormitory Authority of the State of New York is planning to issue $750 million of personal income tax revenue BABs today in a negotiated deal led by Merrill. The bonds have a natural triple-A rating from Moody's and AA-minus from Standard & Poor's — with a structure of serial bonds maturing from 2020 to 2024, as well as term bonds in 2029 and 2039.
Also, in a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote that, "in general, the municipal market remains within ranges established earlier in the Summer, although we have begun to see the next steps of development."
"These include tightening credit and term spreads as more institutional accounts pursue higher yields," he wrote. "In large part, this trend has been fueled by the massive ongoing inflows into tax-exempt mutual funds, but it will not be equally shared by all issues as credit-by-credit distinctions continue to figure strongly.
"California paper has reacted favorably to the treasurer's announced plans for selling $10.5 billion in RANs next month; long yields are now approximating pre-May levels: before the broader market understood the extent of the state's budget crisis," Fabian wrote. "In consequence, we expect investor demand will be strong for the state's notes, regardless of their rating."
Activity in the new-issue market was light yesterday.
In economic data released yesterday, the Empire State Manufacturing Survey "indicates that conditions for New York manufacturers have improved," as the general business conditions index reversed to positive 12.08 in August from negative 0.55 in July. Economists surveyed by Thomson Reuters had expected the index would be positive 2.50.
