The municipal market was largely unchanged yesterday amid light secondary trading activity, as Georgia competitively sold $603 million of debt.
“It’s pretty quiet,” a trader in New York said. “This should be a fairly quiet week, with the Thanksgiving holiday, and a lot of people out on vacation. The new-issue calendar is light, and I don’t really see much secondary trading happening. I think people will be mostly treading water until we come back next week.”
“It was maybe a touch firmer in spots, and a touch weaker in others, fairly spotty, overall just pretty flat,” a trader in Los Angeles said. “We’re talking maybe a basis point better or worse here and there, not really enough to move the scale in my opinion. I’d just call it pretty flat.”
With the Thanksgiving holiday ahead, very few deals are scheduled in the primary market. Estimated long-term volume is expected to shrink to $1.99 billion this week, according to Ipreo LLC and The Bond Buyer.
That’s a dramatic drop from last week’s revised $9.74 billion, according to Thomson Reuters.
In the new-issue market yesterday, Georgia sold $603 million of unlimited-tax general obligation refunding bonds to Citi in the largest slated deal of the week, with a true interest cost of 2.86%.
The bonds mature from 2016 through 2022, with yields ranging from 2.12% with a 5% coupon in 2016 to 3.15% with a 5% coupon in 2022.
The bonds are not callable except for bonds maturing in 2022, which are callable at par in 2019. They have natural triple-A ratings from Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings.
Additionally, New York State competitively sold $351.3 million of GO refunding debt to JPMorgan with a TIC of 2.93%.
The bonds mature from 2010 through 2030. Bonds maturing in 2011 were decided via sealed bid. Bonds maturing in 2010, 2014, from 2017 through 2020 and in 2029 and 2030 were not formally re-offered. All the remaining bonds were sold but not available. The bonds, which are callable at par in 2020, are rated Aa3 by Moody’s, AA by Standard & Poor’s, and AA-minus by Fitch.
The Treasury market mostly showed some losses yesterday. The yield on the benchmark 10-year note opened at 3.36% and finished at 3.37%. The yield on the two-year note opened at 0.72% and finished at 0.74%. The yield on the 30-year bond finished at 4.30% after opening at 4.29%.
Yesterday’s Municipal Market Data triple-A scale yielded 2.81% in 10 years and 3.77% in 20 years, after levels of 2.80% and 3.77%, respectively, Friday. The scale yielded 4.31% in 30 years yesterday, after Friday’s level of 4.31%.
As of Friday’s close, the triple-A muni scale in 10 years was at 83.1% of comparable Treasuries, 30-year munis were 100.2% of Treasuries, and 30-year tax-exempt triple-A GOs were at 103.6% of the comparable London Interbank Offered Rate.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote: “This will be a very slow week, with the holiday taking its toll on the new-issue calendar, staffing levels, and trading liquidity.”
“Last week, the new issues were well received and yields and credit spreads rallied, in particular at the front of the yield curve,” he wrote. “Strength is thus reflecting institutional demand, and muni yields are likely moving from the upper to a lower level within overall range-bound prospects. At some point, institutional demand will soften and bonds, in particular the shorter maturity paper receiving the lion’s share of current demand, will need to be re-priced cheaper to entice retail customers.”
“Still, seasonal vectors are positive — and will remain so until year-end — and there are good prospects for accounts looking to buy shorter-maturity, high-grade bonds that will ultimately become eligible for purchase by the starved money market funds,” Fabian wrote. “Credit issues also remain in focus, but although almost anyone can write an article on the problems state and local issuers are facing, we haven’t seen a single convincing argument as to how these pressures will actually trigger the much-feared 'collapse’ of the municipal bond market.”
In another weekly report, George Friedlander, muni strategist at Morgan Stanley Smith Barney, wrote, “We do not envision long-term muni yields moving sharply higher any time soon.”
“However, what matters here is how individual investors view the outlook, and the sharp drop in new bond fund flows suggests some continuing worries about the outlook for long-term rates,” he wrote. “We would also note, however, that the potential upside for long-term muni rates is probably quite limited at this point. We have found historically that whenever yields on better quality paper in and around 20 years reaches the 5% level, demand increases quite sharply.
“Right now, yields on solid single-A paper in and around the 20-year range is over 4.50%, which would appear to put a ceiling on how much more muni yields could rise,” Friedlander added. “And if a sluggish economy keeps inflation scraping along the bottom for a while, as we expect, the steep slope of the muni yield curve, higher tax rates, and high real raters could all pull investors further out along the yield curve. As the bond fund flows suggest, that hasn’t happened yet.”