The municipal market was weaker yesterday, with more losses situated on the long end.
"We weren't seeing much earlier on, but as the day wore on, more of that weakness came through," a trader in Los Angeles said. "I'd say we're down two or three basis points overall, but I've seen it as much as five or six basis points weaker on the very long end. It's just very illiquid still."
New-issue volume in the municipal market was tremendously impacted by last week's instability. Several large negotiated deals were placed on standby in light of the massive flight-to-quality in the Treasury market and extreme market dislocation following the latest fallout from the sales of two banking behemoths.
Many municipalities opted to put deals on the sidelines that would have otherwise been priced last week or this week due to the tumultuous environment that developed after the news of Lehman Brothers Inc.'s bankruptcy and subsequent agreement to sell substantially all of its North American businesses and operating assets to Barclays Capital, which coincided with Bank of America's planned purchase of Merrill Lynch & Co.
Those events were then topped off by the news that the Federal Reserve decided on an $85 billion bailout of American International Group Inc. as well as the announcement of an overall market rescue plan by federal officials Friday.
Deals began being postponed - or significantly reduced in size - by mid-week, and that scenario appears to be the case again this week, as many of the largest deals are without a specific sale date and instead are being considered for pricing on a day-to-day basis, depending on market conditions.
Yesterday, a number of additional deals were postponed, the largest of which include a $500 million New Mexico competitive note sale slated for today, two separate competitive deals from Wake County, N.C., worth $354.5 million and $69.9 million, both slated to sell today, and two series of New York competitive bonds worth about $160 million scheduled to sell today.
Volume is expected to be an estimated $2.41 billion this week, compared with a revised $2.43 billion last week, according to Thomson Reuters. This follows $17.07 billion being sold in the municipal market in September through last Friday.
Underwriters say they are closely monitoring the market with the hope of seeing enough stability, liquidity, and demand for new issues to be priced.
Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said that "what's really complicating the market's current status is the proximity to quarter end."
"So I think from an issuer's point of view, you need to effectively write off the rest of the month of September if you're seriously considering doing deals - just because generally speaking, as you progress towards the end of a given quarter, the market tends to be less liquid," he said. "Managers begin to do a little bit of window dressing, if you will. But with all of the occurrences in the last five to eight business days, you would see that particular trend really accelerate, and I would think that the market doesn't truly get more liquid until the early part of October."
However, Pietronico doesn't think the "window" for deals to price will open dramatically in October.
"I think the better credits will see market access, and I think the marginal credits will have difficulty, which really has been the case for a good deal of this year," he said. "I think the bankruptcy of Lehman and the conversion of Merrill into Bank of America has seriously reduced the liquidity in the market, and that is going to be particularly difficult for the marginal issuers, or the below-investment grade issuers."
Pietronico also said that it wouldn't surprise him if the market stays illiquid into 2009.
"That's obviously a fairly long distance away, but at this stage, so much has happened that I just don't think there's a lot of risk appetite in the market for putting capital to work, and I think that a lot of folks are just going to try to get to the end of the year without seeing any more upheaval," Pietronico said. "So it's going to be very difficult I think for the next three months, although I would expect to see the market open a little bit more in October. I just don't see it being buoyant until there's more players and more capital available for the market. Right now, that's been reduced rather dramatically in the last 10 days."
The Treasury market was mixed yesterday, after posting losses earlier in the session. The yield on the benchmark 10-year Treasury note, which opened at 3.81%, finished at the same level. The yield on the two-year note was quoted near the end of the session at 2.09% after opening at 2.17%. The yield on the 30-year Treasury was quoted near the end of the session at 4.39% after opening at 4.38%.
"If you look at the bailout, in and of itself, I think the fear is it's going to be somewhat inflationary, that it's going to increase issuance and debt outstanding. So I think that's why we were weaker early on," said Bill Hornbarger, a fixed-income strategist at Wachovia Securities in St. Louis. "On top of that, oil has been everywhere. I think that's a big concern."
However, Hornbarger said, offsetting that is the stock market being down, which he said is "behind why the market's come back a little bit."
"There's still this big fear premium that's willing to rush into the market. And I think that's really what's happened," he said. "You've got another little flight bid coming back into Treasuries."
Moving forward, Hornbarger said he believes Treasuries are still "obviously very captive to the headlines and what's happening in the other markets, to the extent that if we can get some clarification and some stabilization in those markets, I think it would help Treasuries."
"I think it's all tied together at this point," he added. "As long as these markets are volatile and illiquid, I think you're going to see the same in Treasuries."
The economic and new-issue calendars were light yesterday.