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Municipal bonds declined more today than the market has in several weeks as the largest single day of new issuance so far this year proved to be too much of a burden.
New-issue volume was at its highest of 2009 totaling just south of $3.5 billion. The primary market was led by a $1 billion offering from the State of Wisconsin.
In terms of day-to-day total returns:
The high-grade, short end of the curve showed a total return of negative 0.17%, according to Municipal Market Advisors (MMA) data.
The high-grade, intermediate part of the curve showed a total return of negative 0.51%.
The high-grade, long end of the curve showed a total return of negative 0.67%.
The high-grade marketplace of bonds rated double-A or better showed some real signs of strain in both new-issue pricings as well as secondary transactions. It appears that all the fretting by market participants earlier this week about the volume of new deals was spot on.
Underwriters said that deals had to be cheapened in order to find enough buyers to close deals out. However these cheap clearing levels also acted to reprice most outstanding bonds and made for some poor trading levels. Absolute yield levels are entering a range where retail buyers are usually interested but for now they are holding out for this market to cheapen further.
In the non-investment grade sector of non-rated bonds or triple-B and lower, bonds also performed poorly. The secondary market for these credits was not active. But in the primary, Detroit, Mich., sold $120 million of A-rated water revenue bonds yielding 5% in 10 years that were also wrapped with bond insurance by Financial Security Assurance Inc.
That is a tax-equivalent yield of almost 7.50% depending on your tax bracket. Compare that to the 3% trading levels of the U.S. Treasury bond today and one starts to get the picture.
The new-issue market was very large today. Wisconsin's offering of $1 billion annual appropriation bonds is by far the largest of the year. Triple-A rated Wake County, N.C., was probably the most widely watched deal today, though. As a top-notch credit, it dictated the tone for the rest of the market. Merrill Lynch & Co. won the bonds in a competitive auction that had yield-levels notably cheaper than anticipated. It caused the market to decline when it sold at 11 a.m. today.
Major deals priced today:
-- $1.028 billion general fund annual appropriation bonds for Wisconsin; A1/AA-/A+; retail only.
-- $435 million general obligation bonds for Wake County, N.C.; Aaa/AAA/AAA; competitive bid.
-- $450 million wastewater system revenue bonds for Los Angeles, Calif.; Aa3/AA/AA; retail only.
-- $445 million mental health services facilities improvement revenue bonds for the Dormitory Authority of the State of New York; NR/AA-/A; retail only.
The jump in yields today is the largest in weeks.
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.