The municipal market was weaker today, following the declining Treasury market.
Traders said tax-exempt yields were higher by about four basis points overall.
"It's about as quiet as it is hot right now," a trader in New Jersey said. "It doesn't feel like other people are out. People just don't want to do anything. Mondays are usually horrible, and this is even worse. Really clean blocks on the long end are probably down three to four basis points, but we're probably off four to five in most other places."
"There's not much of a muni market out there," a trader in New York added. "Everybody's watching Treasuries, equities, and oil. Some big numbers come out this week. Inflation or growth, which is it? It's a tug of war. Treasuries are all over the place, but they're trading in a narrow range."
"There's not a ton of offerings," the trader continued. "We're kind of just playing around with what's on the Street. The market's certainly not following the extremes up and down, but it's kind of tough to get business done."
The Treasury market showed sizeable losses today. The yield on the benchmark 10-year Treasury note, which opened at 3.91%, finished at 4.03%. The yield on the two-year note was quoted near the end of the session at 2.75%, after opening at 2.37%.
"To a large degree, [the Treasury sell-off is] resulting from the rebound in equities," said John Canavan, an analyst at Stone & McCarthy Research. "The fact that equities have found their footing has moved people away from the safe haven in treasuries. This sparked technical selling as [two-year Treasury notes] moved above 2.50%. In the process, this sparked flattening trades, which is why relatively the losses in the long end aren't as bad."
In economic data released today, the pending home sales index came in at 88.2 in April, after an 83.0 level the previous month. Economists polled by IFR Markets had predicted an 82.6 level.
In a weekly report, Matt Fabian, managing director of Municipal Market Advisors, said: "Last week, the bond market struggled with competing currents from economic weakness and rising inflation risk."
He also noted that "volatility in Treasury flows are difficult for the municipal sector to follow in general, likely hurting the bid from crossover and hedged investors," and that "a thin institutional demand," "the lack of commoditized pricing," and "nagging fears that repercussions from MBIA/Ambac downgrades will be more severe than anticipated" only made things worse.
Last week, Standard & Poor's dropped both MBIA Insurance Corp. and Ambac Assurance Corp. to AA from AAA, and placed them on negative watch, while Moody's Investors Service placed both companies on review for a possible downgrade.
Fabian wrote the rating actions would have minimal impact, as "only the very aggressive investors are likely to have been assuming some credit benefit from these guarantors." But he said the downgrades will "exacerbate the relative shortage of high grade paper," which "may help offset weakness in benchmarks and statement valuations while broadening credit spreads."
Meanwhile, in his weekly report, George Friedlander, managing director and fixed-income strategist at Citi, noted that the market "generally took the news [of the downgrades] in stride, as bonds backed by the two insurers are already generally trading based on underlying ratings."
He also noted that "as risk-taking has begun to reemerge and the previous extreme flight to quality, which had supported Treasuries, has begun to reverse," fixed-income sectors including the municipal market have outpaced the Treasury market. In particular, the municipal market has also been helped relative to Treasuries by the June reinvestment period, strong household demand and the steep slope of the municipal bond curve.
Although "munis are no longer the unusual 'bargain' they had become at the peak of the disruption in late February and its aftermath," he wrote, "we believe that they continue to be priced attractively, given yields that are still somewhat on the high side in comparison with Treasury benchmarks and the still-steep slope to the muni curve."
In the new-issue market today, Banc of America Securities LLC priced for retail investors $65 million of home ownership revenue bonds for the North Carolina Housing Finance Authority, subject to the alternative minimum tax. The bonds mature 2009 through 2017, with term bonds in 2022, 2028, 2032, and two term bonds in 2038. Yields on all bonds are par coupons from 3.2% in 2009 to 5.5% in 2038. A $19.5 million term bond maturing in 2038 was not offered during the retail period. The bonds, which are callable at par in 2018, are rated Aa2 from Moody's and AA from Standard & Poor's.
Goodyear, Ariz. competitively sold $44.5 million of general obligation bonds to Prager, Sealy & Co., with a net interest cost of 4.58%. Bonds mature 2009 through 2037, with yields ranging from 2% on a 6% coupon in 2009 to 4.88% on a 4.25% coupon in 2037. The bonds, which are callable in 2018, are insured by Financial Security Assurance Inc.