The municipal market was weaker again yesterday continuing an overall trend in trading sessions this week.
"We're definitely off a bit again," a trader in New York said. "As some of this new issuance comes out there, it's hard for the market to support it. The long end is probably off three or four basis points at this point, but overall, the market is down a good two basis points."
Trades reported by the Municipal Securities Rulemaking Board yesterday showed losses. A dealer sold to a customer New York City 5.5s of 2026 at 6.15%, up four basis points from where they were sold Tuesday. A dealer sold to a customer New York's Liberty Development Corp. 5.25s of 2035 at 8.26%, two basis points higher than where they traded Tuesday. A dealer sold to a customer California 5s of 2032 at 6.44%, up three basis points from where they were sold Tuesday. Bonds from an interdealer trade of Golden State Tobacco Securitization Corp. 5.125s of 2047 yielded 9.55%, five basis points higher than where they traded Tuesday.
"There's no doubt that supply is weighing heavily on this market," a trader in Los Angeles said. "The long end is feeling it worse than the shorter and intermediate ends, but there's weakness all across the curve, at least two or three basis points on the whole."
The Treasury market also showed mild losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 2.65%, was quoted near the end of the session at 2.66%. The yield on the two-year note was quoted near the end of the session at 0.85% after opening at 0.84%. The yield on the 30-year bond, which opened at 3.04%, was quoted near the end of the session at 3.06%.
Tony Crescenzi, chairman of Miller Tabak Asset Management, wrote in a report that many market participants have wondered recently whether Treasuries are "in a bubble," and that the "answer should go directly to an analysis of what constitutes fair value for Treasuries."
He said the main determinants of Treasury yields are the federal funds rate, the inflation rate, and liquidity preferences. "On the first two fronts, U.S. rates arguably are fairly valued because both the funds rate and the inflation rate are low and Treasury yields are trading at reasonable levels relative to these rates," Crescenzi wrote.
"That said, investors will eventually believe both the funds rate and the inflation rate will rise, which obviously means that when optimism grows about the chances for an economic recovery, expectations on both the funds rate and the inflation rate will change, and yields will rise," he continued. "That will take time. So if there's a bubble, it is in liquidity preferences, evidenced prominently by T-bill rates. I believe that these excesses will begin reversing by the middle of January when there is at the minimum a short burst of optimism ahead of Barack Obama's inauguration and investors peer over the valley a bit."
Meanwhile, the Treasury Department auctioned $28 billion of three-year notes with a 1 1/8% coupon at a 1.245% yield, a price of about 99.65. The bid-to-cover ratio was 2.15. Federal Reserve banks also bought $841.5 million for their own account in exchange for maturing securities.
In the new-issue market yesterday, JPMorgan priced $1 billion of revenue bonds for the Massachusetts Health and Educational Facilities Authority on behalf of Harvard University. The bonds mature from 2014 through 2023, with a term bond in 2036. Yields range from 3.15% with a 4% coupon in 2014 to 5.80% with a 5.5% coupon in 2036. The bonds, which are callable at par in 2018, are rated triple-A by Moody's Investors Service and Standard & Poor's.
Seattle competitively sold $259 million of municipal light and power improvement and refunding revenue bonds to Merrill Lynch & Co., at a true interest cost of 5.51%. The bonds mature from 2009 through 2023, with term bonds in 2025 and 2029, yielding 2.50% with a 5% coupon in 2010 and 5.60% with a 5.5% coupon in 2021. All other bonds were not formally re-offered. Bonds maturing in 2029 are insured by Berkshire Hathaway Assurance Corp.; all other bonds are uninsured. The underlying credit is rated Aa2 by Moody's and AA-minus by Standard & Poor's.
JPMorgan also priced $53.7 million of affordable housing revenue bonds for the New York State Housing Finance Agency. The bonds mature from 2009 through 2018, with term bonds in 2023, 2028, 2033, and 2041. Yields range from 2.20% in 2009 to 6.75% in 2041, all priced at par. The bonds are callable at par in 2018, except those bonds maturing in 2011, which are callable at par in 2010. The credit is rated Aa3 by Moody's.
The North Dakota Public Finance Authority competitively sold $47.1 million of state revolving fund program bonds to Piper Jaffray & Co. The bonds mature from 2009 through 2022 and from 2024 through 2028. Yields range from 2.64% with a 5% coupon in 2011 to 5.59% with a 5.5% coupon in 2026. Bonds maturing in 2009, 2010, from 2013 through 2021, and in 2024, 2027, and 2028 were not formally re-offered. The bonds, which are callable at par in 2018, are rated Aaa by Moody's.
Finally, Depfa First Albany Securities LLC priced $40 million of capital project bonds for the University of Pittsburgh. The bonds mature in 2037 and 2039, both yielding 4.45% with a 5.25% coupon. The bonds are rated Aa2 by Moody's and AA by Standard & Poor's.
In economic data released yesterday, wholesale inventories dropped 1.1% in October after a revised 0.4% dip the previous month. Economists polled by Thomson Reuters had predicted a 0.2% decline. Wholesale sales dropped 4.1% in October, after a revised 2.1% decline.
