Not since July 29th had the 10 year treasury bond seen 3%. Pressure from newly minted positive economic news, a drop in treasury holdings by foreign central banks, U.S. willing to fund the IMF in order to help bailout Europe and fears of mortgage sellers pushed treasury rates higher in the past 2 days ( 10 yr was 2.74% early Tuesday). Munis fared much better only giving up 6 bps in the past 2 days in the much maligned (for good reason) MMD. Ratios continue to get richer for munis -- 10 yr MMD 94.6% of treasuries and the 30 yr MMD 102%---not a good sign for the tax exempt market. The only bright light is that the tax exempt supply is manageable vs. the upcoming BAB calendar. Next week approximately 40% of the $11 billion calendar is BABs. Another 20% is airport issues. Mainstream issues have taken the back seat.
Speaking of BABs, spreads continue to widen with the lesser credits feeling the heat. "A" rated entities are slipping into the high +300 spreads and even some "AA" credits are well into the +200 spread area. Buyers know that a wave of BABs is coming in the next few weeks and are picking and choosing the deals they want to own. Being included in the Barclay's index has become paramount to these buyers and the issuers who qualify ($250mm minimum maturity size) reap the rewards... those who do not, suffer. Lesser credits or those who are somewhat tainted by association get hurt the most. American Muni Power (A rated) had to settle for a $250mm deal at + 325 in 2050 downsized from $600+mm initially whispered at +287.5- 300 range. They have a companion deal of $1.3 bil in 2 weeks!! Also Chicago (Aa3/ A) finalized it's deal at +330 but had to downsize by 50%.
The two worries in the tax exempt market are : (1) no BAB extension-- this will cause higher rates on tax exempt deals in the 11 year and out range and (2) the possibility of the end of tax exemption!! This idea comes up every so often but given the mood of the new Congress it seems to be a bit more worrisome than in the past. If this idea comes to fruition 2 things will happen: bonds already issued will become quite dear and rally (depending on the new income tax rate) and there will be a rush to issue before (if) the new rule becomes law which could cause yet another supply / demand issue --remember the week of Nov 15?? Hopefully cooler heads ( in Washington DC??) prevail and neither idea gets too far.
Last up is the employment number to be released at 8:30 a.m. on Friday. Unless this number is way outside the expectations -- consensus +160k --range +100-+200k jobs-- it looks like it may be a quiet Friday after a taxing (no pun intended) week. Brace yourselves for the deluge of deals-- primarily BABs-- in the next 13 trading days because they they are definitely coming...... have a great weekend.
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