The municipal market was weaker yesterday. Traders said tax-exempt yields were up by about four or five basis points overall.
"The market is very sloppy, very sketchy. It continues to be under pressure from at least the threat of deleveraging, though it seems to have diminished somewhat as the days have gone by," said Evan Rourke, portfolio manager at MD Sass. "There are some positive headlines now, you're starting to see some effects of individual investor interest. Obviously munis are attractive on a relative basis, and as that news starts to leak out to the general public, more and more assets start being committed to munis, which is good."
"It's just more of the same," a trader in New Jersey said. "Just trying to sort stuff out and see if you can develop a bid side for anything you own and anything you might be in touch with. And it's a very difficult market for any new issues."
Municipals remain cheap compared to Treasuries. The ratio between triple-A rated, 30-year GOs and 30-year Treasuries was 113.8% Monday, according to Municipal Market Data.
Rourke said that the landscape could change in the municipal market after the quarter-end.
"I think if you don't see some readjustment, if munis don't get a little bit of a bid because of their relative attractiveness, and they are attractive, then we might be stuck here for some time," Rourke said. "And one of the things that is certainly going to lean towards keeping us here is the high variable rates. Because if you can make 8%, 9%, 10% on a variable-rate security in a market that's declining, that certainly gives you tremendous incentive to not commit capital.
"Just collect my coupon until I feel confident that this thing has turned around. But you need that first wave of buying to help everybody feel that it's gone far enough. The greed bid has got to take over from the fear sell."
The Treasury market, however, showed some gains yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.84%, finished at 3.81%. The yield on the two-year note was quoted near the end of the session at 2.04% after opening at 2.13%. The yield on the 30-year Treasury was quoted near the end of the session at 4.40% after opening at 4.42%.
New-issue volume in the municipal market was tremendously affected 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 that would have otherwise been priced last week or this week on the sidelines 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 was a $105 million bond anticipation note deal for the Fairfax County, Va., Redevelopment and Housing Authority, which was scheduled to sell competitively yesterday. Also postponed was a $42 million general obligation deal for the Charleston County, S.C., School District scheduled to competitively sell today, and a $10 million competitive Ban deal for Plainville, Conn., scheduled to sell yesterday, which was canceled.
This follows a number of postponements Monday, including a $500 million New Mexico competitive note sale slated for yesterday, two separate competitive deals from Wake County, N.C., worth $354.5 million and $69.9 million, both slated to sell yesterday, and two series of New York competitive bonds worth about $160 million scheduled to sell yesterday.
This week's volume was expected to be an estimated $2.41 billion coming into the 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. However, according to Thomson, with $214 million of bonds being sold Monday, and $1.64 billion still estimated for the remainder of the week, the revised estimate for this week's volume is $1.86 billion for the week.
At least two deals in excess of $20 million were priced in the primary market yesterday. Merrill Lynch priced $253 million of lease revenue refunding bonds for the Los Angeles Convention & Exhibition Center. The bonds mature from 2016 through 2018, with term bonds in 2020 and 2022. Yields range from 4.36% with a 4.25% coupon in 2016 to 5.30% with a 5.125% coupon in 2022. The bonds, which are callable at par in 2018, are rated A1 by Moody's Investors Service and AA-minus by both Standard & Poor's and Fitch Ratings.
Merrill also priced $59.7 million of revenue bonds for the Salem, Ore., Hospital Facility Authority. The bonds mature from 2012 through 2018, with a term bond in 2023. Yields range from 4.22% with a 5.25% coupon in 2012 to 5.92% with a 5.75% coupon in 2023. The bonds, which are callable at par in 2018, are rated A-plus by both Standard & Poor's and Fitch.
Though activity in the primary market yesterday was again muted, there was moderate activity in the secondary market. Trades reported by the Municipal Securities Rulemaking Board showed losses.
Bonds from an interdealer trade of MBIA Insurance Corp.-backed New Jersey Economic Development Authority 5s of 2029 yielded 5.16%, up four basis points from where they were sold Monday. A dealer sold to a customer Illinois Finance Authority 5.5s of 2038 at 5.82%, five basis points higher than where they traded Monday. A dealer sold to a customer MBIA-insured California 5s of 2032 at 5.48%, up six basis points from where they traded Monday.
The economic calendar was light yesterday.