The municipal market was unchanged to slightly weaker yesterday in light trading, following Treasuries.
"There isn't a whole lot going on right now," a trader in New York said. "There's a bit of weakness, but nothing substantial. It's maybe one or two basis points weaker, if anything."
Trading activity, as reported by the Municipal Securities Rulemaking Board, was light yesterday.
"It was hard to get anything going," a trader in Los Angeles said. "No one was really trading. I saw the market as weaker by about a basis point, but I wouldn't argue if you called it flat."
The Treasury market showed some losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.60%, finished at 3.66%. The yield on the two-year note was quoted near the end of the session at 2.07% after opening at the same level.
In economic data, factory orders climbed 2.3% in December after a revised 1.7% increase in November. Additionally, factory orders excluding transportation rose 0.7% in December after a revised 1.5% jump the month before. Economists polled by IFR Markets had predicted a 2.3% gain in factory orders, and a 1.9% uptick in factory orders excluding transportation.
A $3.2 billion sale of economic recovery bonds by California will test the choppy waters of the municipal market, headlining an estimated $6.18 billion slate of new-issue volume in the primary market.
"This week, a supply calendar returns that, despite a spate of Treasury auctions and data, could provide positive price leadership to the market," wrote Matt Fabian, managing director at Municipal Market Advisors, in a weekly report. "We expect the California offering will be initially offered cheaply to invigorate demand. Still-heavy leveraged holders may look to move bonds on any uptick, creating further opportunities for less mark-to-market sensitive investors to buy spread bonds at attractive yields. Floating-rate spreads may see sharp adjustments on good/bad developments for the monolines."
Lehman Brothers will price a $3.2 billion deal for California, which is expected to be offered to individual investors in a retail order period today and tomorrow ahead of the institutional pricing on Thursday. The bonds are tentatively scheduled to mature from 2008 to 2011 with a 2023 term bond, and there are mandatory tenders in 2010 and 2011. The bonds are rated Aa3 by Moody's Investors Service, AA-plus by Standard & Poor's, and AA-minus by Fitch Ratings.
Another large deal will be begin pricing Thursday, when New York City starts a three-day retail order period for a $475 million tax-exempt fixed-rate general obligation sale that the city put on the calendar late last week. The sale is the first piece of a planned $650 million GO issuance and will be led by Loop Capital Markets, which is making its debut as a senior manager for the city.
The sale will also include $75 million of taxable fixed-rate GOs and $100 million of tax-exempt variable-rate GOs later in the month, city officials said. New York City is rated AA by Standard & Poor's, Aa3 by Moody's, and AA-minus by Fitch.
Besides these, the supply of other sizable deals is limited to a handful of smaller offerings in the Northeast, Midwest, and Southwest.
The Maryland Health and Higher Education Facilities Authority will issue $261.2 million of revenue debt on behalf of the Washington County Health System. Merrill, Lynch & Co. is expected to price the offering tomorrow with a structure that matures from 2012 to 2043. The Series 2008 bonds will come uninsured and will carry ratings of BBB-minus from Standard & Poor's and BBB from Fitch.
The Northeast activity will also include a $205.1 million sale of local highway and bridge service contract bonds from the New York State Thruway Authority. Morgan Stanley will offer the bonds to retail investors tomorrow, followed by an institutional pricing on Thursday. Details about the structure and expected ratings were not available at press time on Friday.
In a weekly report, George Friendlander, managing director and fixed-income strategist at Citi, wrote that "yields in the high-grade muni market as a percentage of Treasury yields are near all-time highs, all along the yield curve."
"In addition, with muni credit spreads having widened sharply, long-term medium-grade muni yields as a percentage of Treasury yields are at all-time highs - roughly 112%, or, in some cases, more," Friedlander said. "This is the case as well for medium-quality paper 'wrapped' by one of the weaker insurers: the market is generally pricing these as if the insurance did not exist. As a result of these high relative yields and an increasing slope to the yield curve as short-term yields drop sharply, buyers are beginning to appear at the long-end of the curve, both among retail investors and a number of performance-oriented institutional investors."
Furthermore, Fabian wrote in his report that the "roller-coaster news on the monolines is an unwelcome and disruptive influence on the muni market."
"However, operations have so far been orderly," he said. "Further, leveraged holders and banks have been increasingly willing - or impelled - to unwind positions at lower price levels, creating an opportunistic bid side for individual and other traditional investors. With evaluations now more clearly showing the impact of the insurers' troubles, this trend is likely to continue, supporting the market - and even compressing spreads - at more retail-friendly levels."
Friedlander wrote that, in his view, "the muni market is in the midst of an important transition that includes the following features: (1) less reliance on the bond insurers and more on underlying ratings; (2) less reliance on tender option bond programs as a source of demand and more on substantial individual investors; and (3) a heightened focus on credit quality at the state and local levels as the problems of subprime borrowers and a weaker economy hit home." q
