The municipal market was slightly weaker Friday amid fairly light secondary trading activity, ahead of more than $14 billion of new issuance in the coming week.
“We’re a little bit weaker, but there’s not a ton of trading,” a trader in Los Angeles said. “People are mostly on the sidelines today. There are some bits and pieces trading, and we’re down maybe two or three basis points, but past that, we’re just looking ahead to next week and the beefy new-issue calendar.”
Municipal Market Data’s triple-A scale yielded 2.64% in 10 years Friday, two basis points higher than Wednesday’s 2.62%, while the 20-year scale yielded 3.76%, three basis points more than Wednesday’s 3.73%. The scale for 30-year debt climbed three basis points to 4.20% Friday from 4.17% Wednesday.
This culminates a volatile week in which the MMD 30-year triple-A scale increased by 27 basis points. In fact, 30-year yields climbed 24 basis points through the week’s first three sessions, the first time the scale jumped 24 or more points over a three-day period since January 2009.
The municipal market was closed Thursday in observance of the Veterans Day holiday.
Friday’s triple-A muni scale in 10 years was at 95.7% of comparable Treasuries and 30-year munis were at 98.6%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 108.0% of the comparable London Interbank Offered Rate.
The Treasury market was mixed Friday. The benchmark 10-year note finished at 2.77% after opening at 2.64%. The 30-year bond finished at 4.27% after opening at 4.32%. The two-year note finished at 0.51% after opening at 0.42%.
Activity in the new-issue market was light Friday, ahead of a $14.1 billion slate of long-term new issuance set to hit the primary next week. That figure excludes Wednesday’s $10 billion revenue anticipation note sale for California, which is also selling the week’s largest long-term offering: $2 billion of taxable Build America Bonds set to price Thursday.
Alan Schankel, managing director at Janney Capital Markets, wrote in a research note that the “post-election shift in political balance may signal the death knell of the Build America Bond program.”
The enacting legislation provided for the program, and its 35% federal subsidy, to expire at year’s end.
“Despite several attempts at extension bills, Congress recessed for the election with no extension provisions enacted,” Schankel wrote.
“Now that the political winds have shifted, the likelihood of extension has diminished. The program has certainly benefitted municipal issuers by lowering interest costs on municipal debt, but it also carries a cost to taxpayers.”
He indicated that it is possible a BAB extension could be taken up in the lame-duck session, but it is unlikely to be a priority.
“We rate the probability of extension at well below 50%,” Schankel wrote, noting that even if the program is extended, the subsidy level likely would be decreased from 35%. Some pre-election proposals had subsidy levels as low as 30%, marginalizing the financial benefit to issuers.
In economic data released Friday, the University of Michigan’s preliminary November consumer sentiment index reading was 69.3, from a final October reading of 67.7.