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The municipal market began last week with what might have been painful price concessions as dealers began to sell the huge Wisconsin bond issue.
announced intention to buy both Treasury and mortgage securities helped set a floor, at least for now, on interest rates, encouraging more risk taking by institutional buyers and heating up demand for bonds.
Although the taxable and tax-exempt markets haven't exactly been well connected this year, the strength of the Treasury rally was enough to carry high-grade munis to their strongest one-day rally since December. At the same time, concerns over issuer credit quality, bond-by-bond liquidity, supply and inflation drove both credit and maturity spreads wider, meaning lower rated and longer dated positions did not fully participate in the market's strength.
Those spreads will be tested again this week as our market looks to digest the $4B loan by California, the largest new issue in years. However, preliminary pricing appears attractive for both individuals and longer-tenure total return buyers. And renewed federal efforts to support our market may add a favorable context for pricings this week.
Muni spreads are wider, creating opportunities for buyers
While high-grade bonds have shifted back into neutral on last week's rally, lower rated, safe sector bonds now demand attention. We exhort income-oriented buying of safe-sector loans, regardless of rating, insured status or geography (i.e., Michigan). Pre-refunded bonds have better liquidity and near-term price performance. We also advise generic caution with respect to health care issuers, but higher yields in this sector are also creating attractive opportunities for selected credits.
One means to tighten systemic muni credit spreads is to improve issuers' secondary market disclosure, and there are ways to do so without abridging state and local autonomy from the federal government.
We encourage industry participants to enter the discussions now taking place as the lack of any consensus inhibits correction of notable problems in credit transparency.
Matt Fabian is managing director at Municipal Market Advisors.