A long week as evidenced by very large rises in rates for both the treasury and muni market. But the story does not end there. From the close on 11/30 to the close on 12/10, treasury rates rose much faster than munis -- except for the 30 yr. This does not bode well for the muni market as percentages of treasuries surely do not engender buying inside 10 years. Some examples:
BP rise from 11/30: 3 yr T +31 bps vs. munis +8 ratio Munis / T 97%
5 yr T +47 bps vs. munis +12 74%
7 yr T +52 bps vs. munis +19 79%
10 yr T +45 bps vs. munis +22 91%
30 yr T +29 bps vs. munis +33 104%
As the White House and the Republicans came to an understanding to the tax extension package last Tuesday- stimulus by any other name-- the QEIII hopes of even more bond buying than the announced $600 bil was quickly forgotten and the rout was on in treasuries. The fallout from the expected non extension of the BAB program as expected hit the long end of munis but at the same time inside 10 years has become more vulnerable. It will be difficult to sell a lot of bonds down the curve as the ratios are just horrible... especially with rates as low as they are.
As posted on an earlier blog, liquidity is at a premium and ever more so with 9 trading days till Christmas and only 14 until a new year unfolds. The calendar sits at $10 + billion for munis this week with approximately 50% of that in BAB product. The bet is that more BABs than already announced will come to market in the next 2 weeks and continue to widen spreads of those lesser credits and those deals not index eligible.
To top it all off, the economic news front is full. Tuesday brings PPI, retail sales and the FOMC minutes (probably the most important). Wednesday has CPI and Empire state manufacturing index, Thursday housing starts, Philly Fed and unemployment claims. Finally Friday brings leading indicators and a quadruple (quadruple?) witching hour for equity futures. Nice touch!!
An article posted in the WSJ :" Illinois Seeks Wall Street Cash" is chilling.. as I watch the Pats crush the Bears in the snow!!
The outlook for 2011 is far from cast in stone. Does inflation rear it's ugly head-- probably not-- but rates may be destined to rise some more regardless. On the other side, the market is still wary of a meltdown in Euroland which could cause yet another buying spree in treasuries. Without the BAB extension, the supply / demand equation in munis looks to be somewhat lopsided towards supply which usually turns out badly. The bright light in all this is that with possible higher yields on the horizon, mom and pop retail could come back stronger than it has been and mitigate some of the rate rises for issuers. One thing is certain: volatility is back and the market players like that tune. It will be an adventurous year if we continue to have weeks like this past one and that of 11/15 every month.....
No comments:
Post a Comment