Municipal Bond Traders Cap Week of Solid Selling
April 28, 2011
But after two weeks in which the summer supply drought appeared to break, traders were carefully watching the ratios between muni and Treasury yields, which have been at the top of their annual range all summer. Long-term tax-exempts now yield about 81% of Treasury bond yields, while short-term munis yield around 67% of T-bills. In February, when flat-tax talk held the muni market in a death grip, some long munis were yielding 92% of Treasurys. Because of the market's relative richness, and because long muni yields around 5.75% have been turning off retail buyers, some traders believe munis will underperform Treasurys in any rally. This week, muni mutual funds sold bonds enthusiastically, with several hundred million dollars in customer bid lists reported. Some funds were thought to be selling to meet redemptions (the funds lost $731 million in the week ended Wednesday, according to AMG Data Services), but dealers said others could have been raising cash to pay for some of the new issues that have come to market in August. The funds' selling fever provided a mirror image of another market movement: Suddenly, there is more to buy. As New York State's delayed issuance rushes into the marketplace, and as lower interest rates persuade issuers to undertake refundings, the supply outlook looks promising. Visible supply, the measure of expected new issuance over the next 30 days, is now at $2.5 billion, 20% higher than at the beginning of August -- and that represents only offerings now scheduled. If Treasury bond yields stay below 7.00%, many more issues likely will emerge, as did $150 million in Florida and $228 million in New York State general obligation offerings this week. Next week, scheduled new issues include $120 million in Connecticut general obligation bonds at competitive bidding Wednesday and $76 million in Ohio Building Authority bonds in a negotiated sale via a Goldman Sachs group. In other activity, the Ohio Building Authority's $4.5 billion in outstanding lease debt was upgraded to Double-A-minus by Standard & Poor's Rating Group, as part of the agency's upgrade of Ohio's GO debt to Double-A-Plus from Double-A. Dealers' secondary inventories also are beginning to bulge. Standard & Poor's Blue List now is around $1.31 billion, compared with $800 million earlier this month. With more bonds available, sellers can be more confident they'll have something to buy, if and when they decide to get back in the market. That confidence allowed for more selling, and more liquidity, in the market this week than has been seen throughout the summer.
