Hurricane Sandy's floodwaters didn't immobilize the entire municipal market when they inundated large swathes of the New York metropolitan area, just the part driving it: issuance.
Industry watchers predicted that some deals would be priced during the shortened week. But the bulk of the week's
In the storm's aftermath, the market has been waiting for underwriting operations to recover and get back online, and for larger new deals to reach the market.
The buyside, though, emerged from the storm mostly unscathed. Many are based in Boston, which was lightly affected, and in Chicago, and out on the West Coast. The advisor industry remains well-represented, industry watchers add, meaning the retail investor is, too, as a result.
But the temporary setback to half of the market has rendered an investor base of asset managers, retail investors and financial advisors even more cautious and hesitant than they have been of late, said Tom Metzold, co-director of municipal investments at Eaton Vance.
"It's a period where people care about what happens, but not so much that they'll make a decision that's could be a poor decision because of a lack of information," he said. "They're holding back and waiting for someone to make a first move. People are somewhat apprehensive, given the uncertainty everywhere in the marketplace. We're all sitting on pins and needles. The hurricane makes it that much easier to not make a decision."
This dynamic rests on New York banks returning to operational status. It's proven particularly difficult to get a clear picture of the market, Metzold said, because so many deals were postponed and so many market participants aren't in their offices.
"The market is truly in a slow-motion mode of activity," he said. "A number of firms' backup facilities aren't fully staffed because people can't get to them. There aren't as many phones ringing or updates, or Bloomberg messages, coming in."
Duane McAllister, a co-manager of the BMO intermediate tax free fund at BMO Global Asset Management U.S., agreed. The market has been experiencing a bit of a disruption, he said. But the impact on supply should not have long-term consequences.
What deals arrive this week will be well-received, he said; what might not be well-received will most likely be held.
Uncertainty had tightened its grip on the market as the U.S. elections and, soon thereafter, the fiscal cliff approach. Subsequently, investors have been facing smaller calendars for the past month with no proportionate slackening in demand.
Days before the storm arrived, New Jersey shelved its $2.6 billion competitive offering of tax and revenue anticipation notes. The notes were scheduled to arrive Tuesday and lead all issues in the anticipated $5.88 billion calendar.
Even without the hurricane, muni bond investors expected to face another week of lackluster issuance, where no significant deals were scheduled to reach the market. A deal for $400 million of Connecticut general obligation bonds was expected to top the list of long-term issues.
Morgan Stanley Thursday held preliminary pricing for $355.1 million of East Bay Municipal Utility District water system revenue refunding bonds. But it was a California issuer.
New issuance, as it has for much of 2012, will set the tone for the coming weeks. It will continue to affect demand and yields. In the short term, the calendar's recovery will affect munis' relative value to Treasuries, said Chris Ryon, managing director and co-portfolio manager at Thornburg Investment Management.
"Our market is a new issue-driven market, so to the extent that new deals come in we'll do fine," Ryon said. "If more of them get pushed back and delayed, you'll see us give up a few points to Treasuries."
Yields continue to linger in record low territory, according to Municipal Market Data numbers. The 10-year triple-A yield has been holding this week at 1.72%, 12 basis points above its low for the year — which was its record low — and 12 basis points below its average for 2012.
While issuance has been stubbornly moderate of late, demand for tax-exempt paper remains very strong. Investors note that yields should climb somewhat in Sandy's shadow, but not appreciably with such robust demand.
"It's been a bit of a frustrating market," McAllister said. "Every deal has been met with strong demand. It's been challenging to get the size I want with some of these issues."
The larger new deals, in particular, should continue to be well-received and oversubscribed, Metzold said.
"There's so much demand for the right deal, an attractive deal," he said. "There are so few deals that any deal becomes the right deal."
Credit spreads remain very tight because there are too few bonds to satisfy the demand, industry pros say.
Since the start of October, the 10-year triple-A to single-A spread has compressed to 70 basis points from 74 basis points. Since the start of the year, it has compressed from 96 basis points. Triple-A to single-A spreads for five-year and the 30-year munis have seen similar tightening, MMD numbers show.
Muni ratios to Treasuries have cheapened over the past few days from the rich terrain they occupied for most of the latter half of October. The 10-year has climbed to almost 102% from 95% on Oct. 18, MMD numbers show. But the recent increase, in the wake of Hurricane Sandy, hasn't surprised investors.
"We've gotten richer from the end of September and in October," McAllister said. "It wouldn't surprise me if we cheapened a little bit here, compared to the Treasury market."
Thanks to Sandy, there has been a flight to quality, Metzold said, but not one that has helped munis.
"You've had Treasuries rally," he said. "And munis, because they haven't traded, haven't kept pace with Treasuries. We've gotten a little cheaper to Treasuries. But it's hard to know what our relative value is without a full day of trading."
