Municipal bonds were little changed yesterday as the market idled while Citigroup Global Markets Inc. received $55 million in retail orders on $132 million of Vermont general obligation bonds with a top yield of 4.05% in 2018.
Treasuries ended the session mostly lower weighed down by the prospect that the U.S. Treasury will borrow a record $177 billion during the current quarter, up from $113 billion during the fourth quarter of 2003.
Also adding to softness in governments, the January Institute of Supply Management manufacturing index came in at 63.6, up from 63.4 in December. This indicated the sector was growing at a healthy pace and boded well for the overall level of economic activity, according to Kevin Logan, senior market economist at Dresdner Kleinwort Wasserstein.
There is a lot of momentum to the growth of manufacturing activity, he said. Were beginning the quarter at a slightly higher level than the average for the last quarter. The economy grew at 4.0% in the fourth quarter and this data suggests we will probably see growth of 3.5% to 4.0% in the first quarter as well.
Personal income and spending as well as construction data were slightly weaker than expected, giving some support to Treasuries. Construction spending rose 0.4% in December while personal income in December rose 0.2%, while spending increased 0.4%. In November, income was up a revised 0.3%, while spending rose by a revised 0.5%.
Gross household income is actually quite weak, Logan said. What has been driving spending is tax cuts and low interest rates. Its something to keep an eye on how much income will actually grow. That depends on growth in employment, and we will be looking at that on Friday.
In the municipal arena, yields were little changed with some firming in spots but traders reported low overall participation ahead of the new issue calendar this week which gets under way in earnest today.
New issues will give a good taste of where the market is, a trader in New York said. Institutions have been sitting on the sidelines waiting to spend their money but they want to see a fairly organized market. And that looks like its going to happen today.
Last week the new-issue calendar was still in a dormant state according to George Friedlander, fixed-income strategist at Citigroup Global Markets, but that did not help municipals which underperformed their taxable counterparts.
The problem is that net demand for municipals remains extremely muted, for the [following] reasons: weak or even negative net demand from crossovers/arbitrageurs/tender option bond programs, zero net demand (or slightly worse) from muni bond funds and an extremely resistant direct retail buyer, he said in the firms latest Municipal Market Comment.
Individual investors are staying on the sidelines because of rate shock, expectations of higher interest rates and renewed focus on the equities market.
Market participants are also aware as to just how light the calendar has been, and they are worried that a return to recent historical issuance levels would be difficult for the market to handle, given the current structure of demand, he said.
However, Friedlander said that at this stage a dramatic rebound in issuance seems unlikely because state and local finances are improving, thus reducing the need for one-shot financings to meet budgetary pressures, and need for new infrastructure financing has yet to pick up.
