The municipal market was unchanged to slightly weaker yesterday. Traders said tax-exempt yields were flat to higher by about two basis points overall."There's not a ton trading at this point, but we are cheapening up a bit," a trader in New York said. "We're definitely seeing a little bit of weakness out there, particularly in the more intermediate maturities. We're probably down a good two basis points on the whole, maybe a bit more in spots."
"It feels a little weaker, but I'm not sure there are enough people in the market, enough trades going on to really move the scale," a trader in Los Angeles said. "It feels pretty quiet, and the tone is definitely weaker, but I'd tend to say we're more unchanged, with a weaker tone, than actually off. At most, we're off a basis point or two, but again, I think I'd lean more towards unchanged, just because it's so quiet."
The Treasury market showed some gains yesterday. The yield on the benchmark 10-year note, which opened at 3.56%, 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 1.03% after opening at 1.09%. The yield on the 30-year bond, which opened at 4.37%, was quoted near the end of the session at 4.27%.
As of Friday's close, the triple-A muni scale in 10 years was at 82.8% of comparable Treasuries, according to Municipal Market Data.
Additionally, 30-year munis were 104.4% of comparable Treasuries. As of Friday's close, 30-year tax-exempt triple-A general obligation bonds were at 107.3% of the comparable London Interbank Offered Rate.
Billion-dollar deals from issuers in California and Texas will dominate the municipal market this week on the heels of two similar offerings that priced last week, and at a time when investors continue to clamor for paper in the face of a nearly $50 billion supply shrinkage this year.
Supply-hungry investors, however, will see only a little more than half of last week's supply as an estimated $4.25 billion in total long-term volume is expected in the primary market, according to Ipreo LLC and The Bond Buyer.
Last week the market absorbed a revised $8.36 billion in total long-term volume, according to Thomson Reuters.
This week's major deals will include a $1.01 billion sale of prepaid gas revenue bonds from California's M-S-R Energy Authority, which represents three municipal utilities. The deal accounts for nearly a third of the estimated $3.12 billion in negotiated supply expected this week.
The issue, which is expected to be priced by Citi on Thursday following a retail order period tomorrow, consists of serial bonds maturing from 2020 to 2029 and term bonds due in 2034 and 2039.
The bonds, whose proceeds will be used to purchase a 30-year supply of natural gas, are rated A by Standard & Poor's and A-plus by Fitch Ratings.
Short-term investors, meanwhile, will see an additional flood of supply when Texas sells its $5.5 billion tax and revenue anticipation note deal in the competitive market today.
Short-term deals are not included in the estimated weekly volume. The issuer has set the coupon at 2.5%. The one-year Texas Tran deal will come to market with the highest short-term ratings from all three major rating agencies - MIG-1 from Moody's Investors Service, SP-1-plus from Standard & Poor's, and F1-plus from Fitch.
Activity in the new-issue market was light yesterday.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote that the "municipal market remains largely outside the reach of volatility in Treasuries."
"Very low nominal yields on high grade paper have been steadily protected all summer by strong demand for both tax-exempts and Build America Bonds from retail, banks, funds, and insurance companies," Fabian wrote.
"In particular, we note exceptional inflows into the tax-exempt mutual funds: the $40 billion received so far this year is equal to 10% of all tax-exempt long-term mutual fund assets on Dec. 31. Through the first part of the summer, investors focused on purchasing more liquid, high-grade products to protect their portfolios against a repeat of the fourth quarter 2008's systemic liquidity crisis.
"However, the last few weeks have seen money flow into riskier and longer maturity purchases as buyers seek better yields, beginning to re-tighten the credit and term spreads blown out by the bond insurance crisis," he wrote.
"Current spread tightening may be, finally, laying the groundwork for a post-crisis muni market that relies less on bond insurance and more on issuers' financial disclosure. This week's primary market is tiny, and, with secondary bonds being evaluated through likely clearing levels, potential sellers may be reluctant to trade; activity should stay slow."
Morgan Stanley Smith Barney's George Friedlander wrote in a weekly report that "in our view, it is likely that the muni market will remain in a trading range for now."
"We would not be surprised to see a modest rebound in yields in the fall, when new issue volume is likely to be somewhat higher, especially on the tax-exempt side," he wrote.
"BABs absorbed an unusually large portion of total issuance this week, with $2.5 to $3 billion coming to market, out of a preliminary Bond Buyer estimate of total issuance for this week of $7.7 billion. We are expecting overall supply to rebound by late September or so: many issues have been delayed by state budgetary wrangling, which should be over, at least temporarily by the fall."
The economic calendar was light yesterday.