Activity in the tax-exempt market was light to moderate yesterday as municipal yields finished the session mostly unchanged, though with glimmers of firmness throughout the scale.
Traders said tax-exempt yields were flat to selectively lower by one or two basis points.
"It's pretty quiet, but we're seeing some gains," a trader in New York said. "It's flat in spots, but for the most part, I'd say slightly firmer, maybe a basis point or two better. But there's not a ton of activity out there."
"It's flat for the most part, but the tone is firmer," a trader in Los Angeles said. "Mostly in the intermediate part of the curve, maybe we're a basis point or two better, but we're mostly just flat."
The Treasury market showed some losses yesterday. The yield on the benchmark 10-year note, which opened at 3.14%, was quoted near the end of the session at 3.22%. The yield on the two-year note was quoted near the end of the session at 0.91% after opening at 0.85%. The yield on the 30-year bond, which opened at 4.09%, was quoted near the end of the session at 4.18%.
As of Friday's close, the triple-A muni scale in 10 years was at 89.8% of comparable Treasuries, according to Municipal Market Data. Additionally, 30-year munis were 107.8% of comparable Treasuries. Also, as of the close Friday, 30-year tax-exempt triple-A rated general obligation bonds were at 120.5% of the comparable London Interbank Offered Rate.
As the spring reinvestment season gets under way, investors expecting June 1 coupon and maturity payments will have no shortage of supply this week.
Large health care deals in California and Pennsylvania are expected to be priced as part of an estimated $7.66 billion of new volume, according to Ipreo LLC and The Bond Buyer.
This week, $750 million of health care revenue bonds from the California State Communities Development Authority on behalf of Oakland-based health care group Kaiser Permanente will be the largest deal to enter the market. Slated for pricing on Thursday by Citi, the deal will be structured as serial and term bonds. The bonds are rated A-plus by Standard & Poor's and Fitch Ratings.
Pennsylvania is planning to sell $616.8 million of GO debt in the competitive market today. The two-pronged deal consists of $464 million of new-money GO bonds maturing from 2010 to 2029, and $152.8 million of GO refunding debt maturing from 2009 to 2014. The state's full faith and credit GO debt is rated Aa2 by Moody's Investors Service and AA by both Standard & Poor's and Fitch.
In the new-issue market yesterday, RBC Capital Markets priced for retail investors $400 million of revenue bonds for the Allegheny County, Pa., Hospital Development Authority. Institutional pricing is slated for tomorrow. The bonds mature from 2010 through 2024, with term bonds in 2029, two maturities in 2034, and 2039.
Yields range from 2.79% with a 4% coupon in 2011 to 5.80% with a 5.75% coupon in the smaller $25 million 2034 maturity. Bonds maturing in 2010, the larger $66.6 million 2034 maturity, and bonds maturing in 2039 were not formally re-offered. The bonds are callable at par in 2019, except for the $25 million of 2034 bonds, which are callable at par in 2014. The credit is rated Aa3 by Moody's, A-plus by Standard & Poor's, and AA-minus by Fitch.
Also, JPMorgan priced $157 million of health system revenue bonds for Pennsylvania's Geisinger Authority. The bonds mature in 2020, 2021, 2034, and 2039, with yields ranging from 4.19% with a 4% coupon in 2020 to 5.30% with a 5.25% coupon in 2039. The bonds, which are callable at par in 2019, are rated Aa2 by Moody's and AA by Standard & Poor's.
In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi, wrote that a key factor in the continued firmness that has persisted in the municipal market the past few weeks is "the ongoing incursion of taxable Build America Bonds into muni market issuance."
"The spread in yield on BABs over Treasury benchmarks has continued to tighten in, although not to the degree seen on the first few deals, which came at wide spreads and then rallied powerfully when freed to trade in the secondary market," he wrote. "As a consequence, yield savings to issuers on longer-term BAB issues continue to be in the 80 to 100 basis point range, before the value of the optional call is considered. Even with the value of that call at roughly 30 to 35 basis points or so, that means that issuers are still seeing savings of 50 to 70 basis points over traditional tax-exempt offerings.
"A handful of deals have even come to market with more traditional call features, although the savings appear to be far less in these cases," Friedlander said. "Quite simply, investors in taxable bonds continue to pay the most for munis that conform to the conventions that give them the greatest potential for performance relative to their taxable yield benchmarks: a make-whole call but no optional call, and bullet maturity issuance as opposed to smaller, less liquid serials. Nevertheless, more issuers appear to be willing or able to structure a portion of their financing program to conform to these conventions, pulling a substantial proportion of the long-term market into BAB territory, away from traditional munis."
Matt Fabian, managing director at Municipal Market Advisors, wrote in a weekly report that "municipal bonds retained a generally positive tone last week as another huge influx of money to the mutual funds met a relatively thin new issue calendar."
"As a result, secondary liquidity and trading were strong, and credit spreads, at least initially, tightened as some new buyers began to stretch for yield," he wrote. "Some larger sellers were able to move blocks of bonds fairly easily, yet selling appeared to be more opportunistic as opposed to system-wide profit taking."
The economic calendar was light yesterday.