The Bond Buyer's weekly yield indexes rose dramatically, as tax-exempts grew continuously weaker amidst this week's credit crunch.
"It really is, at this point, a question of balance sheet tolerance for munis. And unless we get a bit more tolerance for munis on the balance sheets, it could continue to get weaker," said Matt Fabian, managing director at Municipal Market Advisors. "That, and sort of fear about [American International Group Inc.], will probably keep munis from doing a sharp rebound like we did in March and August."
The municipal market was unchanged to slightly weaker, the calm before the storm that would hit Monday morning.
Following Lehman Brothers Holdings Inc. filing for Chapter 11 bankruptcy protection, and Bank of America's purchase of Merrill Lynch & Co., the municipal market was mixed Monday, despite the Treasury market showing steep gains in a flight-to-quality bid and tumbling stocks. Traders said tax-exempt yields were slightly lower on the short to intermediate end, but weaker by as much as four basis points on the long end.
Munis were weaker Tuesday, as the Federal Open Market Committee held the federal funds rate unchanged at 2%, while participants continued to deal with the fallout. Traders said tax-exempt yields were higher by about five basis points overall, though some bonds on the long end of the market were weaker by 10 or more basis points.
The tax-exempt market was weaker by about five basis points Wednesday, and close to two dozen issues were either postponed or decreased in size due to continuing market volatility.
Market participants were dealing with the news that the Federal Reserve has decided on an $85 billion bailout for insurer AIG, and that Barclays Capital has signed a definitive agreement to acquire substantially all of the North American businesses and operating assets of Lehman Brothers.
"There's no real bid for bonds right now," Fabian said. "The market needs to stabilize a little bit before issues can come back to the calendar. There is demand for bonds, it's just at cheaper prices than where we are."
Now, as we've seen from the floating market is that they could generally stabilize demand at around 7 to 9% today, so that shows that you can stabilize demand with cheaper prices," he said. "Once that cheaper pricing is adopted in the primary, then issuers will be able to sell bonds. It's going to be at higher yields than they would have sold before, and the calendar is going to be more difficult, but it's not that the buy side doesn't want munis, it's just that munis are too rich."
The municipal market was markedly weaker yesterday, as market participants continued to deal with the turmoil that has endured throughout the week. Traders said tax-exempt yields were at least 10 to 12 basis points weaker overall, but were significantly weaker than that in some spots.
Fabian said that it is difficult to forecast when the market might stabilize.
"Recently, we've gotten a positive bump at the beginning of a new month and quarter. So you can expect that we'll get some stability at least once October starts," Fabian said. "It's hard to say. It could stabilize before then, but at least the coming of the new quarter is not too far off."
The Bond Buyer 20-bond index of yields and the 11-bond index both rose 49 basis points this week to 5.03% and 4.94%, respectively. These are their highest levels since Feb. 28, when they were 5.11% and 5.02%, respectively.
The revenue bond index rose 35 basis points this week to 5.44%, which is the highest it has been since May 20, 2004, when it was also 5.44%.
The 10-year Treasury note yield fell nine basis points this week to 3.53%, which is the lowest level since April 10, when it was also 3.53%.
The 30-year Treasury bond yield fell five basis points this week to 4.16%, which is the all-time low for a Thursday. The previous Thursday low had been 4.20% on June 30, 2005.
The Bond Buyer one-year note index rose 32 basis points this week to 1.93%, which is the highest since May 7, when it was also 1.93%.
The weekly average yield to maturity on The Bond Buyer 40-bond municipal bond index rose 21 basis points this week to 5.55%. That is the highest weekly average since the week ended Dec. 14, 2000, when the average was 5.63%.