The municipal market was largely unchanged yesterday, as participants returned from the three-day Labor Day weekend."It's pretty quiet," a trader in New York said. "There's really not much movement right now. People are just sort of easing their way back in after the long weekend. I'd say we're pretty flat right now."
"We might be a bit better on the long end, maybe a bit weaker on the short end, but it's pretty quiet overall," a trader in Los Angeles said. "Not too much activity, which is to be expected coming back from the holiday, and the calendar is light, too, so that won't help, but activity should pick up quite a bit by next week."
The Treasury market showed losses yesterday. The yield on the benchmark 10-year note, which opened at 3.44%, was quoted near the end of the session at 3.48%. The yield on the two-year note was quoted near the end of the session at 0.94% after opening at 0.93%. The yield on the 30-year bond, which opened at 4.27%, was quoted near the end of the session at 4.31%.
As of Friday's close, the triple-A muni scale in 10 years was at 83.7% of comparable Treasuries, according to Municipal Market Data, and 30-year munis were 99.3% of comparable Treasuries.
As of Friday's close, 30-year tax-exempt triple-A general obligation bonds were at 102.7% of the comparable London Interbank Offered Rate.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, said, "Municipals may have reached another hinge point."
"By mean-reversion type measures, longer maturities are dramatically overbought and credit spread tightening has been overly aggressive," he wrote. "The market could thus be facing a sharp negative repricing in the near term. Yet, outside of an unexpected credit event, there is no evident trigger for such a selloff, and mutual fund inflows and retail engagement, along with growing momentum from the [Build America Bonds] and other [American Recovery and Reinvestment Act] programs, argue for continuing strength."
"If municipals do not sell off in the near term, the market may be establishing new beachheads in its recovery," he continued. "It may also imply a fundamental, and possibly secular, realignment of investor behavior in favor of greater allocations to tax-exempts and municipal credit generally. Still, credit risk in our sector is at its highest point in at least 20 years and is rising. A hypothetical increase in safe-sector defaults would de-legitimize recent credit-spread tightening, but so far, payment and technical defaults have been almost exclusively the province of risky sector issuers."
"This is a highly interesting time for the municipal market," Fabian added.
"Although summer has taken its toll on trading volumes and the new-issue calendar, exceptionally strong investor demand has driven prices and Cusip evaluations sharply higher, in particular for longer bonds and lower rated credits," he wrote. "Customer purchases are not being met - as they normally are - by increased customer sales or primary market issuance. Rather, dealers appear to be sourcing product out of their own inventories or proprietary positions. This situation has created what most participants can identify as a severe scarcity of high-grade paper, forcing managers to buy down credit or term spreads simply to keep their investors invested.
"Also at work are a - possibly secular trend - in the recalibration of retail investor behavior in favor of tax-exempt fixed income, the apparent BAB-related scarcity of tax-exempt paper, and perhaps most importantly, thin summertime liquidity that encourages matrix-priced evaluations to run richer, unchecked by actual trades."
Supply-hungry investors will face a thin calendar of post-holiday fare as an estimated $2.99 billion is expected to enter the municipal market this week, according to Ipreo LLC and The Bond Buyer.
Volume began to slow last week when underwriters and issuers trimmed the new-issue calendar ahead of the Labor Day weekend. A revised $3.32 billion came to market, according to Thomson Reuters.
Sizable offerings of BABs in the Midwest and Southwest as well as a sizable health care offering in the Southeast lead this week's calendar.
The Chicago Board of Education will sell a $547 million deal largely comprised of BABs and a small portion of tax-exempt bonds. The issue, to be priced by Merrill Lynch & Co. tomorrow, consists of $501.9 million of taxable BABs and $45 million of tax-exempts.
The tax-exempt bonds will be offered to retail investors today ahead of the deal's institutional pricing tomorrow. The issue is rated A1 by Moody's Investors Service, AA-minus by Standard & Poor's, and A-plus by Fitch Ratings.
In the new-issue market yesterday, Johnson County, Kan., Water District No. 1 competitively sold $26.2 million of water revenue refunding bonds to Hutchinson, Shockey, Erley & Co. with a true interest cost of 2.26%.
The bonds mature from 2010 through 2020. None of the bonds were formally re-offered. The bonds, which are callable at par in 2018, are rated A1 by Moody's and AAA by Standard & Poor's.
Leawood, Kan., competitively sold $14.9 million of GO temporary notes to Wachovia Bank NA with a net interest cost of 0.54%. The notes mature in September 2010, and were not formally re-offered. The credit is rated MIG-1 by Moody's.
The Abington School District in Pennsylvania competitively sold $13.6 million of GO bonds to Roosevelt & Cross with a TIC of 3.23%. The bonds mature from 2010 through 2025 and were not formally re-offered. The bonds, which are callable at par in 2014, are rated Aa3 by Moody's.
The economic calendar was light yesterday.
