The municipal market was largely unchanged yesterday.
"There's not a whole lot going on so far," a trader in New York said. "Some things are trading, but it's quiet for the most part, and difficult to call. I'd call it unchanged right now."
Trades reported by the Municipal Securities Rulemaking Board yesterday showed little movement. A dealer sold to a customer insured Puerto Rico 6s of 2027 at 7.28%, even with where they were sold Friday. A dealer sold to a customer insured Connecticut Health and Educational Facilities Authority 5.75s of 2033 at 5.94%, down one basis point from where they traded Friday. A dealer sold to a customer insured Bellevue, Wash., 5s of 2024 at 6.27%, even with where they traded Friday. A dealer sold to a customer insured South Carolina 5s of 2032 at 6.31%, one basis point higher than where they were sold Friday.
"There could even be a little bit of firmness out there in spots, but we're flat on the whole," a trader in Los Angeles said. "It's a pretty quiet day, with a lot of people on the sidelines, but we should see some activity later in the week. It's not supposed to be a big week for the new issues, but with so much paper on hold from last month, you never know. A good day in the market could bring some of that paper out."
The Treasury market showed losses at the short end, but gains elsewhere on the curve yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.93%, finished at 3.84%. The yield on the two-year note, which opened at 1.62%, finished at 1.70%. And the yield on the 30-year Treasury bond, which opened at 4.33%, was quoted near the end of the session at 4.24%.
The yield curve flattened on short-end selling and a rally on long-term maturities. The flattening can be attributed to diminished inflation concerns and an unwinding of the flight to safety, according to Eric Lascelles, chief economist and rate strategist at TD Securities.
There is a sense that the Treasury safe haven may not be needed much longer, with an asset redistribution from Treasuries to stocks.
"There is more comfort with stocks," said Tom di Galoma, head of U.S. government bond trading at investment bank Jefferies & Co. The two-year note could yield as much as 1.90% and the 10-year note as much as 4.10% once the market gets through the supply, he said.
Muni yields are providing strong income, but uncertain performance, Matt Fabian, managing director for Municipal Market Advisors, wrote in a weekly report.
"The market is still searching for its 'new normal' with higher than historical yields, retail-friendly par bonds, wider credit spreads, a steeper yield curve, chronic primary market supply pressure, and thinner secondary market liquidity," Fabian wrote. "This week makes a better, but not yet strong, case for optimism."
Fabian recommended that buyers not rush into the market as weakness is expected to persist, though he expected yields may rally this week. Income buyers should look for opportunities and be flexible on maturity and ratings, he wrote. High yielding muni bonds are subject to greater risk from investor outflows and tight credit conditions.
Long-term munis with 5% yields are trading at deep discounts.
"When the market stabilizes, this paper should bounce back strongly," George Friedlander, managing director and fixed-income strategist at Citi, wrote in a weekly report.
Yields have continued to move sharply higher. As a percentage of Treasuries 30-year muni yields have jumped to 141% from 84% in 16 months - "a remarkable and unsustainable shift," according to Friedlander.
Selling pressure from leveraged hedge funds "is largely over," but mutual funds are still experiencing outflows, he wrote. Open-ended mutual funds experienced $2.283 billion in outflows between Oct. 9 and 15, the worst week on record, Friedlander said, but he added that the trend is unlikely to continue.
"We believe that strong demand from the direct retail side will begin to offset the net selling by institutions plus net new-issue supply, and possibly even exceed it," he wrote.
Following the pricing of last week's $5 billion revenue anticipation note sale by California, both the short- and long-term primary markets will be much more subdued this week, with only a handful of negotiated deals expected to be priced by issuers willing to enter the market at the prevailing higher interest rates.
Total volume in the long-term market is expected to be $3.38 billion, compared with last week's revised $1.86 billion, according to Thomson Reuters.
This week's largest anticipated deal is a $350 million revenue obligation sale from the South Carolina Public Service Authority, which is being sold on behalf of Santee Cooper, the state-owned electric and water utility. The bonds are slated to be priced by Goldman, Sachs & Co. tomorrow or Thursday.
In the new-issue market yesterday, King County, Wash., competitively sold $48.4 million of limited-tax general obligation bond anticipation notes to Banc of America Securities LLC with a net interest cost of 1.98%. The notes mature in March 2009, yielding 1.97% with a 3% coupon. The credit is rated SP-1-plus by Standard & Poor's and F1-plus by Fitch Ratings.
Wisconsin's Green Bay Public School District competitively sold $25 million of tax and revenue anticipation promissory notes to JPMorgan with a NIC of 3.35%. The notes mature in June 2009, yielding 3.35% priced at par. The credit is rated MIG-1 by Moody's Investors Service.
In economic data released yesterday, the composite index of leading economic indicators rose 0.3% in September, after decreasing a revised 0.9% in August. The LEI stands at 100.6. Economists polled by Thomson predicted LEI would be off 0.2% in the month.
Patrick Temple-West contributed to this column.
