The municipal market was unchanged to slightly weaker yesterday amid fairly light secondary trading.
“We’re a little bit cheaper out on the long end, but inside of about 20 years, we’re pretty much unchanged,” a trader in Los Angeles said. “In any event, it’s been pretty quiet, and there hasn’t been a lot trading, as far as I can tell.”
“We’re mostly flat and fairly quiet,” a trader in New York said. “I’m not really seeing too much activity out there at this point. There’s maybe a bit of a weaker tone out long, but overall, it’s pretty flat.”
The Treasury market showed some losses yesterday. The yield on the benchmark 10-year note opened at 3.60% and was quoted near the end of the session at 3.63%. The yield on the two-year note opened at 0.79% and was quoted near the end of the session at 0.82%. The yield on the 30-year bond finished at 4.55% after opening at 4.53%.
Yesterday’s Municipal Market Data triple-A scale yielded 3.00% in 10 years and 3.76% in 20 years, compared to levels of 3.00% and 3.74%, respectively, Friday. The scale yielded 4.10% in 30 years yesterday, following Friday’s level of 4.07%.
As of Friday’s close, the triple-A muni scale in 10 years was at 83.3% of comparable Treasuries and 30-year munis were 90.4% of comparable Treasuries, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 92.7% of the comparable London Interbank Offered Rate.
The Puerto Rico Sales Tax Financing Corp. and Illinois will each bring billion-dollar financings to the primary market this week that will contribute to a $5.47 billion slate in estimated new volume, according to Ipreo LLC and The Bond Buyer.
Last week, issuance dipped to a revised total of $2.89 billion in competitive and negotiated sales as a result of the market being closed on Monday in observance of the Martin Luther King Jr. holiday, according to Thomson Reuters.
This week, Citi will kick-start the negotiated activity with the pricing of the Puerto Rico deal tomorrow.
The Series 2010 A bonds consist of sales tax revenue subordinate-lien debt that is structured to mature in three tranches, including current interest bonds from 2015 to 2030, capital appreciation bonds maturing from 2030 to 2037, and a convertible capital appreciation bond due in 2029. The bonds are rated A2 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings.
Illinois is planning to issue its $1 billion of GO debt as taxable Build America Bonds when Barclays Capital prices the deal on Thursday, after taking indications of interest tomorrow.
The Series 2010-1 bonds are rated Aa2 by Moody’s, A-plus by Standard & Poor’s, and A by Fitch.
In a weekly report, Matt Fabian, managing director at Municipal Market Advisors, wrote that last week, “once again, municipals held on to low nominal yields; however, tax-exempts did lag the Wednesday and Thursday flight to safety rally in Treasuries.”
“More muni participants are actively discussing the possibility of a correction in prices this week: a reasonable development noting moderate institutional gains taking on Friday and the potential for a stock market rebound early this week,” Fabian wrote.
“If yields do rise, long bonds appear most vulnerable. These have shown the weakest price momentum recently as traders grow concerned that BAB issuance will be less than forecast. We believe it is too early to make this assessment. Post-Jan. 1 issuance has been largely tax-exempt, but that likely reflects the exceptional demand from Jan. 1 tax-exempt coupon reinvestment.
“Still, persistently low tax-exempt yields versus Treasuries may induce more issuers into traditional offerings; this represents a limited downside to expectations of 2010 performance focusing at the long end of the yield curve,” he said. “As it is, the front end of the curve continues to be exceptionally strongly bid, with tax-exempt money funds and cash alternative investment providers continuing to search for adequate product. This situation will likely persist for some time, bolstering relative performance at the front end and limiting risk there from any imminent correction in prices.”
In another weekly report, George Friedlander, municipal strategist at Morgan Stanley Smith Barney, wrote that, last week, “the muni market was supported this week by the tailwinds of lower new issue supply and a somewhat stronger Treasury market.”
“Nevertheless, one of the reasons for stronger Treasuries: the weaker stock market in the aftermath of President Obama’s announced plans for Wall Street, create some concerns in the muni market as well,” Friedlander wrote. “Namely, how will the market-smoothing function played by dealers be treated/replicated under rules designed to eliminate proprietary trading? It’s not yet clear.”
“By week-end, the muni market had modestly underperformed Treasuries, with yields unchanged to slightly lower, while Treasury yields dropped 13 to 14 basis points on longer maturities,” he said.
“On our view, the slower pace of muni yield declines reflects a somewhat lower level of flows into muni bond funds, and the need to absorb last week’s heavy calendar. The good news is that muni yields, as a percentage of Treasuries, have bounced a bit, giving munis a bit more cushion in the event that Treasury yields do move higher, as the consensus seems to forecast.”
In economic data released yesterday, existing home sales sank 16.7% in December to a 5.45 million annual rate, the largest monthly decline on record, as the year-over-year median price increased for the first time in more than two years.
Economists polled by Thomson Reuters expected existing homes to sell at a 5.90 million annual rate in December, according to the median estimate.
