The municipal market was slightly weaker yesterday as investors returned for the first full market session since last Tuesday, following two early closes and one full close due to the Thanksgiving holiday.
Traders said tax-exempt yields were higher by one or two basis points.
"There was an early morning surge in activity, but it's quieted down since," a trader in New York said. "Still, we're definitely cheaper. There's a lot of good paper sitting out there at really cheap levels. I expected to see a little more buying than we have, but I think people are still a little bit cautious coming back."
The Treasury market, however, showed gains as the stock market posted big losses following yesterday's economic data and comments by Federal Reserve Board chairman Ben Bernanke and Treasury Secretary Henry Paulson.
The yield on the benchmark 10-year Treasury note, which opened at 2.92%, finished at 2.74%. The yield on the two-year note was quoted near the end of the session at 0.91% after opening at 0.99%. And the yield on the 30-year bond, which opened at 3.43%, was quoted near the end of the session at 3.24%.
Bernanke told a meeting of Texas' Greater Austin Chamber of Commerce that further cuts in interest rate targets are "feasible" but their ability to support the economy is limited. He suggested the Fed could "purchase longer-term Treasury or agency securities on the open market in substantial quantities" and "influence the yields on these securities, thus helping to spur aggregate demand."
Paulson said that the U.S. was working on developing more programs to stimulate lending, but warned that a severe financial crisis is stubbornly persisting.
In a weekly report, George Friedlander, managing director and fixed-income strategist at Citi wrote that "clearly a part of the shift in relative yields is simply the ongoing flight to quality-flight from risk that is pulling Treasury yields lower and lower."
"What, then, is pulling absolute muni yields higher? In our view, the answer is fairly simple: right now, there is no new net demand for municipals aside from individual investors buying directly," he wrote. "Muni bond funds have experienced modest but steady outflows. The modest amount of remaining leveraged-hedged positions are being forced to liquidate by the extraordinary underperformance in comparison with Treasuries and Libor swaps."
"The bottom line is that only direct retail buyers are supporting the market," Friedlander said. "While demand from this sector has been quite strong, by Thanksgiving week we were also seeing a considerable amount of 'bid-wanteds' - blocks being put out by individual investors desiring to sell."
Compared to last week's lull in new-issue volume ahead of the Thanksgiving holiday, this week investors will have plenty of deals to choose from - including a handful of some of the most sizable offerings that the otherwise relatively lackluster primary market has seen in recent months.
There is an estimated $6.30 billion in total volume expected to be priced this week, including $5.43 billion in negotiated issuance compared with a revised $1.09 billion last week, as well as $868.8 million in competitive deals versus a revised $148.5 million last week, according to Thomson Reuters.
The largest deal that will usher in the robust post-holiday activity is expected to be a $500 million revenue sale from the Illinois Finance Authority on behalf of the University of Chicago, which is slated to be priced tomorrow by JPMorgan. The deal, which will carry ratings of Aa1 from Moody's Investors Service, AA from Standard & Poor's, and AA-plus from Fitch Ratings, is structured with serial bonds maturing from 2009 to 2028.
In the new-issue market yesterday, RBC Capital Markets priced $75.7 million of unlimited-tax school building bonds for Texas' Northside Independent School District. The bonds mature from 2012 through 2028, with term bonds in 2033 and 2038. Yields range from 2.91% with a 3.25% coupon in 2012 to 5.68% with a 5.5% coupon in 2038. The bonds, which are callable at par in 2018, are backed by the state's triple-A Permanent School Fund. The underlying credit is rated Aa2 by Moody's and AA by Standard & Poor's.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote "a new month begins amid discordant tones."
"What would otherwise be solid demand from individuals - on reinvestment and auction-rate securities settlement cash flow - will clash with low absolute yields, increasing concern over issuer credit quality, a large increase in primary market supply, and potentially more unwindings by arbitrage-oriented investors," Fabian wrote. "This should keep yields range bound, but events remain unpredictable, as even normal year-end tax swap activity has overloaded the thinly-supported secondary market.
"Further, massive muni sector underperformance of both Treasuries and taxable swaps undermines yet another method of valuing tax-exempt securities, although perceived 'cheapness' may induce some relative value buying from speculative or backward-looking accounts."
In economic data released yesterday, spending on construction projects fell 1.2% to a seasonally adjusted annual rate of $1.073 trillion in October as private construction decreased 2.0%, and public construction rose 0.7%. The overall decrease, which was larger than the 0.9% decrease projected by Thomson, followed a revised September level of $1.086 trillion, flat from the prior month.
The Institute for Supply Management index dipped to 36.2 in November from 38.9 in October. Economists polled by Thomson predicted the index would slip to 38.4.