Well the bottom finally fell out in the debt markets today. Treasuries were off overnight and never saw the light of day again. Munis soon followed. The 5 yr T finished the day at a 2.06 up from the Monday close of a 1.88. Likewise the 10 yr faded to a 3.47 close (highest yld in 6 months) up 19 bps and the 30 yr to a 4.53 from a Monday close of 4.41. Munis got bludgeoned all day long ending up anywhere from 11-18 bps higher in yield through the intermediate and long end of the curve. Several factors helped the debacle along: stronger economic news - PPI and retail sales higher than expected-, big treasury futures sellers, economic recovery fears and major sellers in the muni market. This combo fueled the fire all day long with no reprieve. But the selloff picked up steam after the FOMC announcement at 2:15. It gave no new news except one important item: it gave a hint that a discussion about whether QE2 should continue took place. The market took this to mean if growth starts to take hold the buy backs in treasuries may end. Sell, Mortimer, sell!!
New muni deals struggled to get done. NYC ditched it's day 2 of retail orders and priced the deal for institutions --turned out to be a good move. Mass GANs were able to navigate the day by adding more yield to the offering for institutions. Long Harvard bonds which were priced a month ago as 5% cpn @ 4.20 yld traded at the end of the day at par!! Harvard happens to be the favorite benchmark bond for MMD. Ten days ago they were offered at a 4.35. The non extension of BABs has really decimated the long end. All in all a very messy day in the tax exempt world. Ratios are still hurting munis as the 2 yr MMD is 97% of treasuries, 5yr 78% (ouch), 10 yr 93% and the 30 yr 107%. Still not good in the shorter end of the market. Buyers will begin to look in the 10-15 year range to get better pricing. And as the longer end fades institutional buyers and the street alike will be looking for bargains from those who must sell.
BABs continue to be in the limelight : no extension leads to the long end of the muni curve to suffer more every day but some large BAB deals continue to get great numbers (NYC G.O.) leaving the smaller lesser known names to become the table scraps and suffer in wider spreads. Some deals continue to delay or postpone. Eventually these issuers will have to bite the bullet and sell. A $400mm Met Water Reclamation District of Chicago -- Aaa credit-- had to postpone and possibly pull the deal late today as it could only garner enough business to sell $250mm at +175 to treasuries. It may forego the BABs route and sell traditional tax exempt bonds in January.When it came a year ago it was one of the darlings and received a low +125 spread. Illinois influence??
As stated in previous blogs, liquidity is the cornerstone of the market. At this time of year liquidity is at a premium and there is not enough to go around for every deal or bid list. This was no more evident today as the bond market got beaten up more and more... liquidity quickly disappeared. Self perpetuating destruction at it's finest. It really is the wrong time of year to have such a big blow off.
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