The municipal market was unchanged yesterday amid fairly light secondary trading activity, as participants eased their way back from a long weekend.
“It’s pretty dead at this point,” a trader in New York said. “I would say there is probably not going to be any change in scale. The calendar is light, retail is slow, and we are in the summer doldrums. ”
A trader in Los Angeles said that, though light, the market “has a decent tone to it.”
“There aren’t very many trades anyway, but the trades I have seen on our system have been quite good,” the trader said. “I think there is still some July money being invested. The one thing I have found is that if it is a quality name you draw a lot of attention; it’s not totally price insensitive, but it’s reasonably price insensitive. If you have got a good name, people can really use the name. They are not as concerned about prices, as long as they can get hold of the bonds.”
The Treasury market mostly showed some gains yesterday. The benchmark 10-year note quoted near the end of the session at 2.94% after opening at 2.98%. The 30-year bond finished at 3.90% after opening at 3.94%. The two-year note was quoted near the end of the session at 0.63% after opening at 0.62%. Over the past month, the two-year, 10-year, and 30-year Treasuries have declined 13, 24, and 23 basis points, respectively.
The Municipal Market Data triple-A scale yielded 2.75% in 10 years and 3.72% in 20 years yesterday, following levels of 2.76% and 3.72% Friday. The scale yielded 4.00% in 30 years yesterday, following 4.00% Friday.
As municipals have not rallied as strongly as Treasuries, the ratios have improved. Yesterday’s triple-A muni scale in 10 years was at 92.6% of comparable Treasuries and 30-year munis were at 101.5%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 106.4% of the comparable London Interbank Offered Rate.
As the market closes the books on June’s low volume, investors with proceeds from recent coupon and maturity payments to reinvest hope July perks up following the holiday-shortened week’s relatively light calendar.
The week’s offering total is at least half of the revised $4.85 billion that was actually priced last week, according to Thomson Reuters data.
This week’s largest single deal — $404 million of triple-B rated revenue debt from the Virgin Islands Public Finance Authority — is scheduled for pricing by Jefferies & Co. tomorrow. It is structured as $305 million of senior-lien revenue bonds maturing serially from 2012 to 2020 with term bonds in 2025 and 2029, and $99 million of subordinate-lien revenue bonds structured as term bonds maturing from 2020 to 2029.
Moody’s Investors Service rates both series Baa2. Standard & Poor’s rates the senior bonds BBB and the subordinate bonds BBB-minus. Fitch Ratings rates the senior bonds BBB-plus and the subordinate debt BBB.
Elsewhere, the Delaware River Port Authority plans $320 million of taxable Build America Bonds in a negotiated deal book-runner Citi will price either today or tomorrow.
The deal is structured as one single 2040 maturity and is rated A3 by Moody’s and A-minus by Standard & Poor’s.
In the competitive market, Montgomery County, Md., plans to sell between $325 million and $334 million of GO public improvement bonds tomorrow in a three-pronged structure of bonds maturing from 2011 to 2030 that consists of tax-exempt bonds and taxable recovery zone economic development bonds.
Top-rated Missouri is scheduled to sell $125 million of tax-exempt refunding and restructuring GOs today.
John Dillon, executive director at Morgan Stanley Smith Barney, wrote: “As a cautiously stable municipal bond market wades into July, participants are faced with a tax-exempt market that has stabilized and mildly rebounded from an early-June sell-off, but also one that continues to be buffeted by negative headlines and media coverage.”
“Despite these 'headline risks,’ some of which are clear on facts, but cloudy or misguided on conclusions, the tax-exempt arena continues to perform admirably,” he wrote.
“To be sure, investor anxiety has taken its toll and munis continue to lag the performance of similar maturity benchmark U.S. Treasury securities, but differentiating between the 'flights to quality’ in U.S. Treasuries versus the 'anxiety penalty’ for munis is becoming a more difficult task,” he wrote.
“Despite our generally constructive view on the states’ ability and willingness to pay general obligation debt service in a timely fashion, we do acknowledge that the fiscal pressures are indeed acute,” Dillon wrote.
In economic data released yesterday, the Institute for Supply Management’s non-manufacturing business activity composite index was 53.8 in June, down from 55.4 in May, on a seasonally adjusted basis. Economists polled by Thomson Reuters had expected a 55.0 level.
“As the world faces the growing possibility of a second downturn for the global economy, municipalities face a battle of their own,” Justin Hoogendoorn, managing director at BMO Capital Markets, wrote in a commentary.
“Budgetary gaps highlighted the fight recently as state lawmakers met, yet another summer, attempting to balance budgets stressed by declining receipts and growing demand for social welfare programs,” he wrote.
“Heaped on top of the budgetary difficulties, municipalities face an uncertain legal and regulatory environment as the market looks for an extension of the Build America Bonds program,” Hoogendoorn wrote. “In spite of the tough issuer environment, BABs continue to thrive.”
Priti Patnaik contributed to this column.