Municipal yields rose 10 to 15 basis points last week as the market shouldered $6.7 billion of new deals, but issuance will ebb with approaching holidays, giving the Street a chance to work off the supply glut.
New issuance, dominated by $1.2 billion New York City bonds and a $1.6 billion New Jersey Turnpike offering, flooded the primary sector last week, pushing prices lower. By Thursday, the index of 20 general obligation bonds had risen six basis points, to 6.75% from 6.69% on Nov. 14. But by some accounts, the market actually had to give up as much as 15 basis points over the week, mainly in medium-range securities.
Prices are likely to continue to sag slightly this week as the market works off the supply. But traders were upbeat about the prospects for gains in the long term as new issuance ebbs.
"We've been surprised by the resiliency of the market to handle one of the biggest weeks of supply in the history of the market," said one trader. "We've been very busy in the secondary, and there are opportunities if you pull your head out of the sand."
The market will get a break from supply this week as only $950 million in new securities will be priced. In addition, The Bond Buyer's 30-day visible calendar fell to $2.5 billion Friday, the first time it has been that low since Oct. 11, when it was $2.42 billion.
Standard & Poor's Blue List of dealer inventory rose $31 million, to $1.57 billion, but traders said the load was manageable. "The market is a little wobbly, but we've gotten through a lot of bonds in fairly good shape," acknowledged one trader. "We've eaten the bulk of what's coming and we're digesting. The secondary is going to get more focus now that the primary has done its part."
One sticking point for secondary traders is a $425 million Metropolitan Transit Authority deal priced two weeks ago. The deal was crippled last week by New York's surprise announcement that its budget deficit had nearly doubled, to $3.6 billion.
The bonds are backed by state appropriation money, which was put in jeopardy, to some investors thinking, when news of the deficit hit the Street. There was a scramble by the issuer and lead manager Goldman, Sachs to decide whether to pull the deal or move forward. Underwriters opted to raise yields five to 15 basis points in the secondary and sell term bonds on a group net basis in order to get the deal done.
Goldman reported an unsold balance of $13 million late Friday. Traders said some bonds traded near the takedown, but others were down as much as 1 1/4 points.
"Without this deal the market would be in better shape," said one trader. "It's going to take up some capacity dealers have to take positions, and it's hard to find the right level. It's a tainted deal that will have some effect on the rest of the secondary."
Looking to the primary, this week's negotiated sector features $132 million Fulton County, Ga., school district GO refunding bonds, to be priced by Trust Company Bank, and $57 million New Hampshire Housing Finance Authority multifamily housing revenue bonds, to be priced by John Nuveen & Co.
The competitive sector features $114 million Los Angeles Department of Water and Power, Calif., revenue bonds, originally set for sale last week.
Economic news is expected to be friendly for the markets, although prices could suffer from volatility day-to-day, traders said.
Initial claims for the week ended Nov. 16 will be released Wednesday, along with October durable goods and personal income and spending.
Friday's Market
Trading ground to a halt early Friday ahead of the weekend and the upcoming holiday after a taxing week of new deals and a variety of complications.
In secondary action, traders reported weakness, thanks to supply, but prices were narrowly mixed in a 1/4 point range.
In the debt futures market, the December municipal contract settled down 5/32 to 94.09; the December MOB spread narrowed to negative 155.
Bids for bonds backed by guaranteed investment contracts with Executive Life Insurance Co. fell to 44 cents on the dollar from 45 earlier in the day, a trader familiar with the securities said.
In dollar bond trading, North Carolina Eastern 6 1/2s of 2017 were quoted at 96 1/4-3/8 to yield 6.81%. Washington Public Power Supply System 6 7/8s of 2017 were quoted at 98 1/2-99 and Massachusetts Water Resource Authority 6 1/2s of 2019 were quoted at 94-3/8 to yield 6.96%.
