The municipal market was unchanged with a slightly weaker tone yesterday.
"I don't think we've seen the scale move, but I would say the tone is weaker," a trader in Los Angeles said. "I'd call it flat overall, to maybe slightly weaker in some spots."
Trades reported by the Municipal Securities Rulemaking Board yesterday showed some losses. A dealer bought from a customer insured El Paso 5s of 2032 at 4.92%, even with where they were sold Friday. Bonds from an interdealer trade of Jacksonville Health Facilities Authority 5.25s of 2032 yielded 5.67%, one basis point higher than where they traded Friday. A dealer bought from a customer Connecticut Health & Educational Facilities Authority 5.05s of 2042 at 4.63%, up one basis point from where they were sold Friday. Bonds from an interdealer trade of insured Clovis Public Financing Authority, Calif., 4.625s of 2029 yielded 4.87%, even with where they traded Friday.
The Treasury market showed some losses. The yield on the benchmark 10-year Treasury note, which opened at 3.71%, finished at 3.72%. The yield on the two-year note was quoted near the end of the session at 2.18% after opening at 2.14%.
The economic calendar was light yesterday. However, this week will see a slate of economic data released, beginning today with March existing home sales. Thursday will see the release of durable goods orders for March, initial jobless claims for the week ended April 19, continuing jobless claims for the week ended April 12, and March new home sales. On Friday, the final April University of Michigan consumer sentiment index is slated for release.
Economists polled by IFR Markets are predicting 4,950 existing home sales, a 0.6% rise in durable goods orders, a 0.6% increase in durable goods orders excluding transportation, 375,000 initial jobless claims, 3.000 million continuing jobless claims, 580,000 new home sales, and a 63.2 Michigan sentiment index.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote that after several weeks of "exceptional strength," the market "slowed measurably" last week.
"This followed waning interest from retail, as absolute yields have dropped 50 basis points and as equities are looking better amid a flush of optimism that the credit crisis may be winding down," he wrote. "The latter perspective is despite highly negative earnings announcements for financials and relentless weakness in housing."
Fabian wrote that last week's softer muni demand also reflected, "a weaker bid from hedged investors unable to protect themselves from growing inflation risks in the economic data; some gains-taking by accounts that have benefitted from the municipal sector's strong out-performance of taxables since April 1; and a less reliably positive price trend for the surge of primary offerings."
George Friedlander, managing director and fixed-income strategist at Citi, wrote in a weekly report that the long end of the municipal market "may receive a bit of a test" this week, with "more long-term paper on the calendar than it has seen in a while."
"At least 11 $100 million-plus deals are scheduled, but none of them is so onerous in size that it is likely to cause extreme pressure," he wrote. "We are also seeing a bit more paper out for bid by hedged institutions that benefitted from the recent outperformance by munis, but these institutions are still generally only willing to sell at their price. Direct retail will pick up again, we believe, once investors begin to recognize that a return to 5%-plus yields on higher-quality paper on the long end may not be in the cards."
Friedlander added that he expects long-term yields "to stay in a trading range for now."
"Given the steep yield curve slope and trading relationships to taxables that are still at the upper end of the range that existed before Feb. 28, we do not expect muni yields to move up significantly from here, unless the new-issue calendar builds to a surprising degree, or the Treasury market takes another hit," he wrote.
Puerto Rico will headline primary market activity this week, with its scheduled sale of $1.1 billion of general obligation bonds, along with a handful of education deals and at least two sizable auction-rate conversion deals.
Overall, an estimated $7.1 billion of new competitive and negotiated volume is expected to come to market this week. Last week, a revised $9.2 billion of supply made its way to market, according to Thomson Reuters, including a $2 billion Connecticut taxable GO sale.
Puerto Rico is preparing to sell $1.1 billion of GOs either tomorrow or Thursday after pricing $200 million of tobacco bonds on Tuesday. The commonwealth has approximately $46 billion of total outstanding debt, including $8.16 billion of GOs, but at the same time is facing a $1 billion structural deficit for fiscal 2009, which begins July 1. The new GO deal will be priced by UBS Securities LLC and is tentatively structured as serial bonds maturing from 2009 to 2038. It carries ratings of Baa3 by Moody's Investors Service and BBB-minus by Standard & Poor's.
In the new-issue market yesterday, Lehman Brothers priced for retail investors $88.4 million of general revenue refunding bonds for the University of Washington, ahead of institutional pricing today. The bonds mature from 2008 through 2028, with a term bond in 2036. Yields range from 2.25% with a 3% coupon in 2008 to 3.94% with a 4% coupon in 2018. Bonds maturing from 2019 through 2036 were not offered during the retail order period. The bonds, which are callable at par in 2017, are rated Aa1 by Moody's and AA-plus by Standard & Poor's.
