The municipal market was weaker yesterday, ending a trend of falling tax-exempt yields that had endured for several weeks. Traders said muni yields were higher by five to seven basis points.
"Well, I guess the rally couldn't last forever," a trader in New York said. "We had a really prolonged period of firmness pretty much every day, but that's decidedly done with today. At least for today. We're weaker by a good five basis points or so right now. Treasuries are down, and we're following right behind them."
Trades reported by the Municipal Securities Rulemaking Board showed losses yesterday. A dealer bought from a customer New York State Dormitory Authority 5s of 2038 at 4.92%, seven basis points higher than where they traded Friday. A dealer sold to a customer insured Tacoma, Wash., 5s of 2038 at 5.20%, up four basis points from where they were sold Friday. Bonds from an interdealer trade of California 5s of 2034 yielded 5.58%, five basis points higher than where they traded Friday.
Bonds from an interdealer trade of Southern California Metropolitan Water District 5s of 2034 yielded 5.04%, six basis points higher than where they were sold Friday. Bonds from an interdealer trade of insured Pennsylvania Turnpike Commission 5s of 2029 yielded 5.08%, four basis points higher than where they were sold Friday. A dealer sold to a customer Minnesota 4.125s of 2025 at 4.17%, six basis points higher than where they traded Friday.
"We were decidedly weaker today," a trader in San Francisco said. "We'll see what happens as the week progresses, but today, we were weaker for the first time in a long time. We showed signs of weakness on Friday, but it was more flat than anything else. Today though, the demand sort of dried up a bit, and we cheapened up a good amount."
The municipal bond market was closed Monday due to the Martin Luther King Jr. holiday.
The Treasury market showed losses yesterday, though short-term yields declined slightly. The yield on the benchmark 10-year Treasury note, which opened at 2.32%, was quoted near the end of the session at 2.36%. The yield on the two-year note was quoted near the end of the session at 0.70% after opening 0.72%. The yield on the 30-year bond, which opened at 2.87%, was quoted near the end of the session at 2.97%.
Issuers in Texas and the Northeast - led by Connecticut - will take center stage in the primary market this week when they deliver a handful of sizable deals as part of an estimated $3.71 billion of total competitive and negotiated volume, according to Thomson Reuters.
By comparison, last week the market saw a revised $4.94 billion in combined competitive and negotiated volume, according to Thomson data.
A $420 million offering of second-lien special tax obligation refunding bonds by Connecticut is expected to be this week's largest deal. Planned for pricing by Goldman, Sachs & Co. on Wednesday following a two-day retail order period that began on Friday and ended yesterday, the 2009 Series 1 bonds are scheduled to mature from 2010 to 2022. Retail pricing information was not available by press time.
Proceeds from the deal - which is rated A1 by Moody's Investors Service, AA by Standard & Poor's, and AA-minus by Fitch Ratings - will be used for transportation infrastructure purposes.
In the new-issue market yesterday, Banc of America Securities LLC priced for retail investors $175 million of school facilities construction bonds for the New Jersey Economic Development Authority. The bonds mature from 2010 through 2024, with term bonds in 2028 and 2034. Yields range from 2.00% with a 4% coupon in 2010 to 5.49% with a 5.375% coupon in 2034. Bonds maturing from 2021 through 2024 were not offered during the retail order period. The bonds, which are callable at par in 2018, are rated A1 by Moody's, AA-minus by Standard & Poor's and A-plus by Fitch.
JPMorgan priced $123.1 million of certificates of obligation for Irving, Tex. The bonds mature from 2016 through 2029, with term bonds in 2034 and 2039. Yields range from 2.39% with a 4% coupon in 2016 to 5.17% with a 5% coupon in 2039. The credit is rated triple-A by Moody's and Standard & Poor's. The bonds are callable at par in 2019, except bonds maturing in 2019, which are not callable.
Fort Collins, Colo., competitively sold $30.7 million of wastewater utility enterprise sewer revenue bonds to Stifel, Nicolaus & Co. with a true interest cost of 3.86%. The bonds mature from 2011 through 2028, with yields ranging from 1.32% with a 2% coupon in 2011 to 4.65% with a 4.5% coupon in 2028. The bonds, which are callable at par in 2018, are rated Aa3 by Moody's, AA-plus by Standard & Poor's, and AA-minus by Fitch.
Matt Fabian, managing director at Municipal Market Advisors, wrote in a weekly report that recently "the marketing of munis as 'cheap' has become substantially less credible."
"Benchmark yields are now at or below their lowest levels in two decades, and last week's demand very ably digested a large calendar of primary market deals," he wrote. "Demand continues to follow expectations of assistance from the federal government, an apparently broader and deeper base of individual investors, renewed investment in the mutual funds, and growth in regional broker-dealer activity. Yet record low yields, highly aggressive offerings, and low trading volumes keep risk levels high, particularly for total return investors looking for index-based performance."
Fabian also wrote that "one source of potential downside pressure" going forward in the municipal market is "disappointment in the degree to which the stimulus will alleviate muni supply pressure, the postponement of [President] Obama's widely expected tax increases, rising corporate counterparty risks, or issuer credit trauma."
"Regarding the stimulus, we find that the first proposal falls short of the massive impact some infrastructure advocates were expecting," he wrote.
The economic calendar was light yesterday.