Municipal high-grade bonds rallied today, extending gains that began yesterday afternoon and completely repriced this part of the market that had been on a month-long skid.
New issues were cleaned up for the most part today after struggling all week long. Several of the largest deals were even able to boost prices and increase the size as buyers appeared.
In terms of day-to-day total returns:
-- The high-grade, short end of the curve showed a total return of positive 0.46%, according to Municipal Market Advisors (MMA) data.
-- The high-grade, intermediate part of the curve showed a total return of positive 0.97%.
The high-grade, long end of the curve showed a total return of positive 1.47%.
The high-grade marketplace of bonds rated double-A or better made giant strides today. Top-notch credits of deals issued recently improved as much as a quarter-percentage point on the day in some cases -- a very rare event.
Large blocks of $10 million or more of municipals traded easily as a few large money managers and banks saw a discrepancy between the Treasury or taxable bond market and the tax-exempt municipal market. These markets tend to be somewhat correlated and after the rally that Treasuries made yesterday, those with cash sought to buy large amounts of high-grade municipal securities.
In the non-investment grade sector of non-rated bonds or single-A and lower, the story was different. These bonds did improve today, but nowhere near where high-grades did. Over the past year municipals have experienced a large widening of credit spreads. As we are in a credit crisis, lower-rated munis have not been spared despite historic low default rates compared to other fixed-income asset classes.
That being said, several large portfolio managers today said they were able to sell some of their lower-rated paper at levels they wouldn't have been able to the day before.
The new-issue market was finally able to distribute most of the large supply it had all week. The state of Wisconsin, which had been struggling with a $1 billion offering, was able to increase the size of its deal to $1.5 billion and even lift prices in many cases.
Another sign of success was the state of Florida, which doubled the size of its offering of lottery revenue bonds and also increased prices.
Major deals priced today:
-- $1.528 billion general fund annual appropriation bonds for Wisconsin; A1/AA-/A+; institutions.
-- $300 million lottery revenue bonds for the state of Florida; A2/AAA/A; institutions.
-- $168 million general obligation bonds for Loudoun County, Va.; Aaa/AAA/AAA; institutions.
-- $153 million health care system revenue bonds for the Illinois Finance Authority; A2/A/A; institutions.
After a slow, month-long trend of higher yields, the market quickly changed direction, according to MMA's triple-A general obligation consensus yield curve. Such a quick move cannot be sustained.
Matthew Posner is a director with Municipal Market Advisors. Posner writes intraday research, data and commentary on the municipal market and heads up the firm's efforts in Washington, D.C., as an educator of policymakers on the tax-exempt securities market. Founded in 1995, MMA is the leading independent strategy, research and advisory firm in municipal bond industry.