The last of the treasury auctions took place Thursday with the backdrop of more issues in Egypt. The market backed up from Wednesday's close to get a concession for the auction. It worked but as the day wore on bond yields rose due to lack of support for the issue. Treasuries returned to the high yields of Wednesday (3.70 for 10 yrs and 4.77 for the 30 yr).
Munis held there own and yields actually moved a bit lower (1-2 bps) in the 7-30 yr range. Tax exempts have found an uneasy equilibrium for now as supply is quite meager. Money is there to spend, even with continued bond fund redemptions, as retail, managed money and insurance companies invest extra cash. The money continues to chase highly rated issuers and the less fortunate must take what rates the market gives them. NJ EDA is coming back in the marketplace to finish selling the last $600mm bonds they could not place early last month. With the NJ G.O. downgrade by S&P to AA- this appropriation deal becomes split rated (Aa3/A+/AA-). Spreads to MMD look to be around the+150-170 range. The supply calendar remains slight but the fear builds as more talk of future supply will overwhelm the demand. Even with increased retail participation due to higher yields, the consensus is that demand will not be able to match the issuance when it develops. Most of the discussion revolves around the demise of BABs but it is much more involved than that. Since the financial meltdown in 2008, the disappearance of insurance (and AAA ratings) has left over 50% of muni issuance to go on it's own. As liquidity in the financial markets dried up, TOBs lost their capital to buy bonds and leverage them. The lack of insurance left them without the AAA rating needed to create VRDNs. Banks shut down the programs and forced selling of the TOB and hedge fund portfolios. These factors took away a huge part of the buying power in the muni world. These were the players that soaked up the large increase in supply over the last 20 years. Insurance and these buyers made it easy to sell large bond issues at "artificial" rates. That game is now over and may never happen again.
Articles abound about munis and the supply / demand conundrum. The WSJ, Bond Buyer, FT and CNBC continue to keep munis on the front burner. Some of this is just rehashing the past 3-4 months in the tax exempt market. Other articles discuss buyer's thoughts on munis going forward. CNBC continues to have major financial people giving their opinions on munis but most of these experts have no municipal bond experience (other than probably owning some) and lack the understanding of the public finance marketplace. It's always in the context of "I know a guy" when they discuss munis.
Let's move forward to some positives in the public finance world. Next week the state of Illinois will be bringing a $3.7 bil POB taxable issue. Structured to mature from 2014-2019, it matches up quite nicely to the buying strength in the taxable market. A few weeks ago many expected magnanimous spreads to get the taxable world to buy( think +300) given the bad press Illinois and the rest of the muni issuers have received. But a funny thing happened on the way to the sale.. treasury rates rose and corporate spreads tightened as taxable buyers grabbed for more yield from lesser credits than government bonds. The european situation continues to unfold ( unravel more like it) and the only safe haven is here. Company earnings have improved and buyers have become more comfortable with corporate credit. With 5 yr treasuries yielding a 2.39 and 10 yrs a 3.70 it does not take a lot of spread to get to natural yields(4.75- 5% in 5 yr and 6% in 8 yrs) on Illinois bonds for taxable buyers to feast on... A rated GS bonds in the 5 and 10 yr maturities are +135 and +150 respectively. With a spread of +230 in the 8 yr range Illinois could hit a 6% yield. This matches up against Allied (BB) which trades at +275 in 10 yrs. Illinois yields will get a hard look from high yield buyers. Buy an A1 rated U.S. state and sell Allied.. you betcha!! We believe that buyers will focus more on the ultimate yield rather than spread when Illinois gets priced. Buyers just cannot find that yield in a comparably rated corporate credit. People will talk about the yields / spreads that Illinois will pay but it was not long ago that many thought the deal could not get done. A 21/2 week selling tour, meeting with over 90 buyers throughout the world, looks to have done it's magic.
Pitchers and catchers report on Sunday, 2/13!! Still snowing here....
Thursday, February 10, 2011
QUICK UPDATE-- MORE TONIGHT
After a disastrous 3 yr auction on Tuesday, the market was fearful of the 10 yr on Wednesday. With the WI 10 yr bond trading to a high yield of 3.78 late Tuesday, there were thoughts of a 4% 10 year in the near future. But overnight the market stabilized and as the 10 yr auction approached the market started to push the current 10 yr to a 3.69 yld and the WI to a 3.72. Bam!! The bid for the new issue was a 3.665 ( no devil here)... 6 bps thru the 1pm bid and with 71% of buyers being indirect bidders, the street was left with the crumbs. The market rallied and ended the day at a 3.66 yield on the 10 yr. The amount of indirect bids was a record for this or any treasury auction. Overseas buying.. think Far East.. was the catalyst as they have been on holiday for several days and were not able to partake in last week's selloff.
On to munis. With a lackluster calendar and fear of a treasury selloff munis were wary. But at late day MMD was unchanged and there were some very notable trades on the long end that make us think the scale could be pushed today. South Carolina sold $325mm bonds on the short end and the bidding was pushy with the reofferings coming on the MMD scale.
More later with some thoughts on the $3.7 bil Illinois POB deal to be priced next week.
I guess Ms Whitney missed her flight to D.C..... or was she in flight away from there??
On to munis. With a lackluster calendar and fear of a treasury selloff munis were wary. But at late day MMD was unchanged and there were some very notable trades on the long end that make us think the scale could be pushed today. South Carolina sold $325mm bonds on the short end and the bidding was pushy with the reofferings coming on the MMD scale.
More later with some thoughts on the $3.7 bil Illinois POB deal to be priced next week.
I guess Ms Whitney missed her flight to D.C..... or was she in flight away from there??
Tuesday, February 8, 2011
JOBS OR NO JOBS...THAT IS THE QUESTION OR FEBRUARY IS THE CRUELEST MONTH
Last Friday's employment numbers for January -- +36k jobs vs. +140 consensus coupled with a falling unemployment rate --9.0% vs.9.4% for December and consensus of 9.6%, really put the market in a tizzy. How can only 36k jobs be created but have the unemployment rate fall to 9%.....a lot of theories but no real answers. The best theory is that people have given up for the time being and are off the radar. Seasonals could also be at play. We will have to see the numbers over the next several months to truly get the answer. Economists all agree that these numbers can vary wildly from month to month and having the markets rely on this one economic bit of news is more than likely pure folly. Ah Wall St.....
Well the outcome has not been pretty. Govies have given it up over the last few trading sessions with the 10 year range getting hit the hardest. Treasuries declined from a 3.55 yld on the close of 2/03 to a 3.73 today 2/08. The 30 year fared better by only losing 8 bps (4.67 / 4.75) Munis outperformed in the 10 yr sector as yields rose from a 3.35 to a 3.39 on 2/08. But the ratios worsened from 94% to 91%. But light supply in the tax exempt arena was the key factor in saving munis.
The impetus for the treasury selloff has been the auctions this week along with a lot of Fed speak. Today the 3 year, normally a sure fired good auction, really spit the bit and sent the treasury market into it's spiral. Lack of real buyers set the trend. Will this follow into Wednesday's 10 yr and the 30 yr on Thursday? We will wait and see. Possibly with the blowoff a large enough market concession has been built in in order to create better demand. If it does not hold through a 3.85 yld, then the 10 year yield could rise to a 4.25%. Look out world the cruelest month could rear it's ugly head once again. Not a good way to start a new year.
Munis seem to be back in their own little world with buyers continuing to buy top flight credits. Retail continues to buy out through 15 years and then look for quality credits yielding 5+% in the 20-30 year range. Even after the market selloff , NYC TFAs have held there own in the 20 and 25 year maturities. But supply will be back and that is the conundrum. Will there be enough demand to take in the inevitable increase of supply?
Tomorrow the muni "mini series" continues in D.C. with a cavalcade of pundits in front of Government. Just more noise for buyers to sift through and keep all of us on the edge. Rumors are that Ms. Whitney refused to come but was possibly being served a subpoena to appear !! Take that you naysayer!! Anyway the white knight has spoken.
My apologies to William Shakespeare and T.S. Eliot.
Well the outcome has not been pretty. Govies have given it up over the last few trading sessions with the 10 year range getting hit the hardest. Treasuries declined from a 3.55 yld on the close of 2/03 to a 3.73 today 2/08. The 30 year fared better by only losing 8 bps (4.67 / 4.75) Munis outperformed in the 10 yr sector as yields rose from a 3.35 to a 3.39 on 2/08. But the ratios worsened from 94% to 91%. But light supply in the tax exempt arena was the key factor in saving munis.
The impetus for the treasury selloff has been the auctions this week along with a lot of Fed speak. Today the 3 year, normally a sure fired good auction, really spit the bit and sent the treasury market into it's spiral. Lack of real buyers set the trend. Will this follow into Wednesday's 10 yr and the 30 yr on Thursday? We will wait and see. Possibly with the blowoff a large enough market concession has been built in in order to create better demand. If it does not hold through a 3.85 yld, then the 10 year yield could rise to a 4.25%. Look out world the cruelest month could rear it's ugly head once again. Not a good way to start a new year.
Munis seem to be back in their own little world with buyers continuing to buy top flight credits. Retail continues to buy out through 15 years and then look for quality credits yielding 5+% in the 20-30 year range. Even after the market selloff , NYC TFAs have held there own in the 20 and 25 year maturities. But supply will be back and that is the conundrum. Will there be enough demand to take in the inevitable increase of supply?
Tomorrow the muni "mini series" continues in D.C. with a cavalcade of pundits in front of Government. Just more noise for buyers to sift through and keep all of us on the edge. Rumors are that Ms. Whitney refused to come but was possibly being served a subpoena to appear !! Take that you naysayer!! Anyway the white knight has spoken.
My apologies to William Shakespeare and T.S. Eliot.
Wednesday, February 2, 2011
HOW'S THE WEATHER...NOT GOOD JUST LIKE THE DEBT MARKETS
Weather issues throughout the Midwest and Northeast put a damper (sorry couldn't resist that pun) on the debt markets is the last 2 days. Treasuries continue to sell off due to the ADP employment number -- +187k jobs-- and the announcement of next week's auctions of 3s,10s and 30 yr bonds totaling $72 billion. This Friday's employment report will be a VERY important piece of the economic news in deciding the future direction of rates. Munis had it's 2nd bad day after a good run. MMD raised rates by 2-4 bps from 20 years on out -- not enough in this trader's opinion. The market remains soft and any increase in the anemic supply -- average of $3bil/ week since the beginning of 2011... usually in the $8 bil range-- will have a serious effect on rates that issuers will pay on new deals. Another sticky piece is the unwinding of VRDNs due to large increases in the cost of LOCs and what that will do to increase supply on the long end of the market. As stated in earlier blogs, the liquidity in the market is fragile and is the real problem with the concerns over issuer's finances being a distant second. It is the proverbial self fulfilling prophecy: increased supply will cause rates to increase and the fear of this supply has buyers waiting to see this happen. So even with minimal supply, rates will rise as buyers delay their purchases of bonds waiting for the supply!! A vicious cycle indeed.
The economic news has not been overwhelmingly positive but the market is afraid that with the appearance of any light in the tunnel, the Fed will stop QE2 and raise rates. The tolerance level of the IBs for risk is greatly diminished and the negotiated deals will be priced to sell thereby putting added pressure on the secondary market to be repriced. The spiral continues. If there is a dramatic blow off in rates that increases yields by 25 - 50 bps, buyers should take advantage of this opportunity. But if there is an event(s) that cause treasury rates to rally, munis will have a hard time following due to expected increase in supply. So munis are between a rock and a hard place.
The $775mm NYC TFA struggled this week and had to raise rates by 5-12 bps in various parts of the yield curve. A less than robust retail book-- $125mm-- did nothing to encourage the institutional buyers to jump in with both feet. This was the 2nd deal that this issuer has sold in 30 days and it showed even with the Aa1/AAA/AAA ratings on the bonds. This should give you a good feel how weak the demand is when confronted with large supply. North Carolina sold a $500mm appropriation debt deal in the competitive market today, rated Aa1/AA+/AA+ one notch below the G.O. rating and had hefty balances left over. The appropriation nature of the loan hurts the marketability as some major buyers will not buy this type of credit. Look for sales at higher yields than originally offered to help pare down the balance held by the street. This seems to be the theme going forward until we get to levels the buyers believe are juicy enough to put money to work.
On a final note I saw a group of Girl Scouts at the train station today selling their cookies. I resisted temptation due to my inflationary concerns but I know I cannot resist for long. I urge all of you to cast your economic concerns to the wind and buy those delicious cookies!!
The economic news has not been overwhelmingly positive but the market is afraid that with the appearance of any light in the tunnel, the Fed will stop QE2 and raise rates. The tolerance level of the IBs for risk is greatly diminished and the negotiated deals will be priced to sell thereby putting added pressure on the secondary market to be repriced. The spiral continues. If there is a dramatic blow off in rates that increases yields by 25 - 50 bps, buyers should take advantage of this opportunity. But if there is an event(s) that cause treasury rates to rally, munis will have a hard time following due to expected increase in supply. So munis are between a rock and a hard place.
The $775mm NYC TFA struggled this week and had to raise rates by 5-12 bps in various parts of the yield curve. A less than robust retail book-- $125mm-- did nothing to encourage the institutional buyers to jump in with both feet. This was the 2nd deal that this issuer has sold in 30 days and it showed even with the Aa1/AAA/AAA ratings on the bonds. This should give you a good feel how weak the demand is when confronted with large supply. North Carolina sold a $500mm appropriation debt deal in the competitive market today, rated Aa1/AA+/AA+ one notch below the G.O. rating and had hefty balances left over. The appropriation nature of the loan hurts the marketability as some major buyers will not buy this type of credit. Look for sales at higher yields than originally offered to help pare down the balance held by the street. This seems to be the theme going forward until we get to levels the buyers believe are juicy enough to put money to work.
On a final note I saw a group of Girl Scouts at the train station today selling their cookies. I resisted temptation due to my inflationary concerns but I know I cannot resist for long. I urge all of you to cast your economic concerns to the wind and buy those delicious cookies!!
Tuesday, February 1, 2011
THE NEW MINI SERIES IS OVER...BUT NOT HIGHER RATES
Sorry that it has been almost 2 weeks since my last blog (sounds like my confession). A lot has gone on but little has changed. The muni market rally put 10 days in a row together since 1/19 but it seems as though the party may be over for now. Govies have lost ground for the last three days as the worries of Egypt have faded and the economic news has been mildly positive. But munis continued to rally to lower yields, especially on the long end, and this is the problem. Ratios have changed dramatically on the long end of the curve coming down from 110% of treasuries to just 103% in 5 trading days. This does not warm the hearts of the buyers who got back in the market in the last 2 weeks. All the fun has been squeezed out. To counter this, retail, both professional and mom & pop, have been snapping up AAA and strong AA credits throughout the 1-20 maturity range. The buyers are not concerned about the tax consequences as they buy out of state credits with abandon to diversify out of their states. The need for high grade credits underlies the fears of possible problems with issuers of lesser stature. This has created a market that is currently divided into 2 categories: very high grade and those who are not. Guess who wins?? Strong credits and this will not change soon.
Now to the mini series on CNBC. Last week CNBC had all the pundits on the show to counter Ms Whitney ( married to a WWF fighter) in order to prolong it's diatribe against the municipal issuers. But all of them poo-pooed her bet about the death of munis. Finally another crisis arose... Egypt... and munis went back to the corner where they have been hiding for so long. Thank goodness. But this has not stopped the print media from continuing the discussion of the demise of the muni market. The stories flow like wine and the reporting should make the Columbia Journalism School wince at what is being written. In the weekend WSJ there was an article titled "States Plead To Small Investors 'Buy Bonds'". Well I started to think about this article and decided to rebut the poor research in it. Here goes:
I missed this article yesterday that came from the WSJ's Saturday edition. Let's get some things straight. Issuers have been reaching out to retail for over 20 years with retail order periods. The ROP was invented by ML in the late 80's to assist NYC in reaching the masses in distributing bonds. After about 7 years of no access to the market due to it's near bankruptcy in the mid 70's, NYC had huge infrastructure projects (think decaying bridges, subways, roads, schools, etc.) that needed to be funded by bonds ( I moved there in 1975 .. I know). With rates in double digits, the City needed to get the lowest cost of capital it could. Retail was always known to pay more for bonds than institutions as the retail investor is looking for specific bogies in returns. But they never had a chance to buy a new issue as they do today. Most retail bought secondary market bonds. Also at this time the market functioned quite differently than it does today. Issuance was considerably lower than today.. think $100b vs. $400 bil and no negotiated deal ever got done with a total net designated book buying all the bonds. Dealers routinely stocked bonds in anticipation of future sales. The book of orders back then looked more like 50/50 institutional and stock orders. The ROP gave bond houses a chance to get retail orders first before placing orders-- think riskless trades-- and with the bifurcation of maturities they could better suit the retail buyers appetite by offering them more retail friendly coupons for bonds. The outcome of this was a larger pool of investors was reached which would help in lowering costs by gaining a wider distribution. Institutional investors liked the idea as they could see which deals were garnering strong retail interest and therefore give them insight to another market they would need when they turned over their portfolios. Both types of investors benefited. As the ROP took hold issuers across the country, big and small, embraced this idea.This is not a new idea as intimated by the article.. as a matter of fact it has been going on longer than the analyst in the article has been an analyst!! And the selling group idea, even in Connecticut, is far from a new idea..So much for investigative journalism....They routinely placed radio and newspaper advertisements in the week preceding the sale to garner more awareness of the upcoming issue, no longer relying on the broker to call Mrs.. Jones about an upcoming issue. Spring forward with technology, websites are the new medium for issuers to use to reach out to investors. With the call for more transparency, issuers are able to put more information on their websites about upcoming sales, events and the POS. California was the first to embrace this idea followed by NYC,NYS,Mass, Oregon and other large issuers throughout the country. Retail has mostly stayed close to home when buying bonds as they can see and touch their investments.
But this does not change the landscape going forward. Worries persist amongst buyers over the strength of the credits they buy. With the demise of insurance, TOBs, hedge funds and other leveraged buyers, the halcyon days of munis have passed for now and a new reality... I hate the term "new normal"... has emerged. Less liquidity is the new mantra and with that spreads have widened and obtaining credit in the marketplace is much more difficult to achieve at a low cost.
Oh yeah... inflation is in the headlines: apparently the Girl Scouts are charging the same for cookies but the boxes contain less of them....I guess they took a page from the playbook of the cereal industry!!
Now to the mini series on CNBC. Last week CNBC had all the pundits on the show to counter Ms Whitney ( married to a WWF fighter) in order to prolong it's diatribe against the municipal issuers. But all of them poo-pooed her bet about the death of munis. Finally another crisis arose... Egypt... and munis went back to the corner where they have been hiding for so long. Thank goodness. But this has not stopped the print media from continuing the discussion of the demise of the muni market. The stories flow like wine and the reporting should make the Columbia Journalism School wince at what is being written. In the weekend WSJ there was an article titled "States Plead To Small Investors 'Buy Bonds'". Well I started to think about this article and decided to rebut the poor research in it. Here goes:
I missed this article yesterday that came from the WSJ's Saturday edition. Let's get some things straight. Issuers have been reaching out to retail for over 20 years with retail order periods. The ROP was invented by ML in the late 80's to assist NYC in reaching the masses in distributing bonds. After about 7 years of no access to the market due to it's near bankruptcy in the mid 70's, NYC had huge infrastructure projects (think decaying bridges, subways, roads, schools, etc.) that needed to be funded by bonds ( I moved there in 1975 .. I know). With rates in double digits, the City needed to get the lowest cost of capital it could. Retail was always known to pay more for bonds than institutions as the retail investor is looking for specific bogies in returns. But they never had a chance to buy a new issue as they do today. Most retail bought secondary market bonds. Also at this time the market functioned quite differently than it does today. Issuance was considerably lower than today.. think $100b vs. $400 bil and no negotiated deal ever got done with a total net designated book buying all the bonds. Dealers routinely stocked bonds in anticipation of future sales. The book of orders back then looked more like 50/50 institutional and stock orders. The ROP gave bond houses a chance to get retail orders first before placing orders-- think riskless trades-- and with the bifurcation of maturities they could better suit the retail buyers appetite by offering them more retail friendly coupons for bonds. The outcome of this was a larger pool of investors was reached which would help in lowering costs by gaining a wider distribution. Institutional investors liked the idea as they could see which deals were garnering strong retail interest and therefore give them insight to another market they would need when they turned over their portfolios. Both types of investors benefited. As the ROP took hold issuers across the country, big and small, embraced this idea.This is not a new idea as intimated by the article.. as a matter of fact it has been going on longer than the analyst in the article has been an analyst!! And the selling group idea, even in Connecticut, is far from a new idea..So much for investigative journalism....They routinely placed radio and newspaper advertisements in the week preceding the sale to garner more awareness of the upcoming issue, no longer relying on the broker to call Mrs.. Jones about an upcoming issue. Spring forward with technology, websites are the new medium for issuers to use to reach out to investors. With the call for more transparency, issuers are able to put more information on their websites about upcoming sales, events and the POS. California was the first to embrace this idea followed by NYC,NYS,Mass, Oregon and other large issuers throughout the country. Retail has mostly stayed close to home when buying bonds as they can see and touch their investments.
But this does not change the landscape going forward. Worries persist amongst buyers over the strength of the credits they buy. With the demise of insurance, TOBs, hedge funds and other leveraged buyers, the halcyon days of munis have passed for now and a new reality... I hate the term "new normal"... has emerged. Less liquidity is the new mantra and with that spreads have widened and obtaining credit in the marketplace is much more difficult to achieve at a low cost.
Oh yeah... inflation is in the headlines: apparently the Girl Scouts are charging the same for cookies but the boxes contain less of them....I guess they took a page from the playbook of the cereal industry!!
Wednesday, January 19, 2011
DAY 2 OF MUNI RALLY.....A NEW WINNING STREAK
The muni market put together back to back winning days as the MMD curve lowered yields throughout most of the scale with the long end getting most of the change. Changes ranged from 2-7 basis points lower from 2017 on out. The buyers continued to show up not only on the long end of the curve but many buyers who realized they were under invested in munis (think insurance companies -- taxable and BAB buyers in 2010) started buying out past the 10 year range very heavily. NYC Water benefited from the frothiness today selling $450mm long tax exempts and was able to LOWER yields by 3-6 bps from the original pricing. Word is buyers from all walks of life bought this loan (2040 and 2043 maturities) with zeal. Funds, cross over buyers, BAB owners of the same credit, hedge funds, insurance companies and retail snapped up this deal that would have been struggling last week to sell this many bonds on the long end!! Seismic shift in investing for sure. But as always happens in munis, this rally will probably go too far and suffer a set back that will trap the street again. It never fails. Like rookies in Vegas it's all in or nothing. Maybe not tomorrow or next week but it is coming. At some point supply will feel like ice water and wake up the party goers. But we will take it for now.
Ratios are still very favorable for munis vs. treasuries (see 1/17post) : 5yr MMD 97.5% of treasuries, 10 yr 102.4% and 30 yr 110% and higher rates to boot!! Not bad work if you can get it. Although these ratios are not too different than they were in other points in time during 2010, rates are definitely higher now .. more so on the longer end. Therein lies the reason for the rush to buy. Last year many buyers held their noses when they purchased bonds due to the low rates they purchased. The move to higher rates have moved buyers from the sidelines to the actual playing field. Hooray for that.
Rumor has it The Donald bought NYC Waters...... imagine that from beds to bonds.....
Ratios are still very favorable for munis vs. treasuries (see 1/17post) : 5yr MMD 97.5% of treasuries, 10 yr 102.4% and 30 yr 110% and higher rates to boot!! Not bad work if you can get it. Although these ratios are not too different than they were in other points in time during 2010, rates are definitely higher now .. more so on the longer end. Therein lies the reason for the rush to buy. Last year many buyers held their noses when they purchased bonds due to the low rates they purchased. The move to higher rates have moved buyers from the sidelines to the actual playing field. Hooray for that.
Rumor has it The Donald bought NYC Waters...... imagine that from beds to bonds.....
Tuesday, January 18, 2011
THE SKY STOPS FALLING......FOR 1 DAY AT LEAST
The muni market finally got the reprieve it needed after a month of movement to dramatically higher rates on the long end. Not since 12/21/10 has the MMD scale had a move to lower rates until today. All this with the government market moving to higher yields throughout the maturity spectrum! Buyers on the long end took advantage of yields not seen on long munis since the inception of BABs in April of 2009. Cal G.O. 6% coupons in 30 years were offered at a 6.10 yield and quality NYC names such as TFA (Aa1/AAA/AAA) being offered in 5.35% range (last week's deal) and NYC Water in a retail order period with a 5.5% yield in 30 years. Needless to say retail was hungry for both deals.
An interesting twist of fate due to the end of the BAB issuance : as rates on tax exempts have risen due to more supply without BABs, BABs themselves have rallied by tightening spreads to treasuries. This phenomenon has some buyers looking to sell the BAB credit and buy the tax exempt bonds of the same credit. Last Friday we saw some sales of NYC Water BABs at a 5.75-5.85 yield with the expectation that the new tax exempt deal this week to come somewhere in the 5.5% range. The sellers are looking to buy the tax exempt credit while selling the taxable BAB credit of the same issuer and only give up 25-35 bps on the trade. If this relationship between the tax exempt and taxable bond of approximately a 35 bp spread holds, then this would have the buyer purchasing the new tax exempt deal at around a 94% ratio of it's taxable twin!! This most likely will be only for the higher rated credits in the BABs and tax exempt markets and given the ethereal nature of liquidity it could be short lived. It might be the only bright light to come out of the end of BAB issuance.
Alas tomorrow is another day and hope springs eternal that the muni market can have another day in the sun like today...even though it rained and snowed in the northeast! The market set up certainly looks better than last week's with another small calendar due to early January and the holiday week.
One more thing....I hope The Donald has a good night's sleep!!
An interesting twist of fate due to the end of the BAB issuance : as rates on tax exempts have risen due to more supply without BABs, BABs themselves have rallied by tightening spreads to treasuries. This phenomenon has some buyers looking to sell the BAB credit and buy the tax exempt bonds of the same credit. Last Friday we saw some sales of NYC Water BABs at a 5.75-5.85 yield with the expectation that the new tax exempt deal this week to come somewhere in the 5.5% range. The sellers are looking to buy the tax exempt credit while selling the taxable BAB credit of the same issuer and only give up 25-35 bps on the trade. If this relationship between the tax exempt and taxable bond of approximately a 35 bp spread holds, then this would have the buyer purchasing the new tax exempt deal at around a 94% ratio of it's taxable twin!! This most likely will be only for the higher rated credits in the BABs and tax exempt markets and given the ethereal nature of liquidity it could be short lived. It might be the only bright light to come out of the end of BAB issuance.
Alas tomorrow is another day and hope springs eternal that the muni market can have another day in the sun like today...even though it rained and snowed in the northeast! The market set up certainly looks better than last week's with another small calendar due to early January and the holiday week.
One more thing....I hope The Donald has a good night's sleep!!
Monday, January 17, 2011
SCARE TACTICS, ILLIQUIDITY, SUPPLY OR LITTLE BIT OF EVERYTHING??
In the past month the municipal bond market has gone through quite a metamorphosus. In mid December the sky seemed to be falling. But as long rates rose to year long highs, investors stepped in to buy munis. The keys seemed to be the end of the treasury bond slide, Harvard University(Aaa, AAA, AAA) 30 year paper trading at 5% and expectations of a good retail reinvest in January. In the next few days Harvard bonds rallied back to a 4.60 level and MMD followed from a 4.84 to a 4.66 over three trading sessions. But the week after Christmas led to a small sell off due to lack of participants thus less liquidity. It only took a few days after the new year to make the street realize that any interest from retail was still on the short end of the curve and the rally not only sputttered but as bid lists from institutions popped up the rout was on. Since the end of BABs became a fait accompli, the market has grown concerned over future supply and the ability to chew through it all in a reasonable fashion. It is now a reality.
In steps the new municipal finance expert, Meredith Whitney. In her interview on 60 Minutes she expressed her concerns about possible large scale muni defaults in the coming year. Not just large scale but HUNDREDS OF BILLIONS OF BONDS (rather impossible ). After this interview, munis , which usually put financial writers to sleep due to it's laconic nature, came to be the lead story in every financial report whether in print or on television. Every market pundit on the news shows was asked about muni bonds and their safety. Never mind none of these people had a deep background in the area. So the storm grew to outsized proportions. When Whitney's muni piece came out in the fall, several muni asset managers called her and offered to pay the purported $100,000 price for her voluminous report. She declined. When asked by asset managers and then by Andrew Sorkin of CNBC which municipalities would be high on her list of defaults, she demurred. To quote an old Texas expression"Big hat --No cattle" to describe her. On the CNBC show this past week both Becky Quick and she called BABs "Buy America Bonds" --so much for good investigative journalism and research.
Meredith also said that due to Michigan's restructuring of it's debt to longer maturities that they have defaulted !! So if you took advantage of redoing your mortgage this year , you have defaulted... check your credit scores! It is fairly obvious that she does not understand what an advance refunding is. Here are some quotes from Whitney's interview on 60 Minutes on 12/19/2010:
"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted.
Asked how many is a "spate," Whitney said, "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."
And when discussing rating agencies:
"When individual investors look to people that are supposed to know better, they're patted on the head and told, 'It's not something you need to worry about.' It'll be something to worry about within the next 12 months," she said.
Here is the full script about munis on 60 Minutes.
The CNBC interview this past week finds her stumbling through some of her statements. But what I find most annoying, but is a CNBC trait, is CNBC's need for the headlines and no regard to possible mistruths. Why didn't they invite Bill Gross from Pimco, which probably has more financial analysts on staff that are more erudite on municipal finance , or another well known municipal deity to be across the desk and ask her more questions or rebut her statements? It is these one view looks that send shivers up the public investor's spine. As the week progressed they did interview more people ( John Miller of Nuveen and Mohamed El - Erian of Pimco to name a few) who basically said that there will be some defaults as there are every year but this is an opportunity to buy very good credits at great ratios to government bonds at this stage (see below). Also noted was the fact that these pundits very much disagreed with Whitney's conclusions as to the amount of defaults. A bit late probably. Just remember CNBC still denies it had anything to do with the tech bubble in 1990-2000.....Well enough of being Walter Winchell for the day, let's get back to markets.
This past week started with some trepidation concerning the 2 sizable deals in the market: $875mm NYC Transitional Finance Authority (TFA) (Aa1/AAA/AAA tax supported debt) and $1.9bil NJ Eco Dev Auth for school facilities, a refunding issue of short term debt and swaps ( oops default) (Aa3/AA-/AA- state appropriated debt). As stated above, the market has been nervous about supply after BABs were terminated. Well if last week's performance was any indication, it will be a long year for issuers. With the dearth of long end buyers (TOBs, Hedge funds, cross over buyers, et. al.) since the 2008 meltdown, the long end of the market has struggled at times to perform well vis a vis the shorter end even in the rush to low rates. See curve analysis below. Not only did both deals have to adjust scales to higher levels to get done, NJ had to lower the amount it borrowed to just under $1billion. Just a bit too many bonds to swallow. Along with the lack of buyers on the long end of the market, bond funds have been getting record redemptions for the past 2 months. Add to the mix that the cost of LOCs that are expiring( letters of credit) used on VRDNs has skyrocketed from 5-10 bps when written 3 - 5 years ago to 125 bps and higher in order to renew. Some of this short paper will undoubtedly have to be remarketed further out the curve putting more pressure on fixed rates and at the same time cause a dwindling of short supply for money market funds and keeping short rates low. More curve steepening??
Muni / Treasury ratios Aaa MMD vs Treasuries as of 1/14/2011
5 yr 97.5% normally 70-75%
10 yr 104% normally 78-83%
30 yr 112% normally 88-93%
Muni yield curve 2yr to 30 yr
6/15/2007 70 bps
6/15/2008 233 bps
6/15/2009 372 bps
11/15/2010 380 bps
12/12/2010 404 bps
12/12/2010 404 bps
01/14/2011 433 bps
Going forward the February through May time frame has historically unkind to the rates markets. Look for demand for munis to continue to be soft versus supply and very volatile markets in the near future. A big challenge coming up will be the State of illinois Pension Obligation Bond (POB) taxable deal coming in mid February, Tentative structure is $3.7 billion from 1-8 years. With all the problems the state has been encountering, this will be a mammoth task for the management group to accomplish. The managers will leave no stone unturned in looking for buyers for this debt. Morgan Stanley, Goldman Sachs and Loop Capital are the co senior managers.
The bright light for municipal issuers is the pick up in tax receipts from 2009 to 2010. if this continues this will surely help in toning down the rhetoric about defaults. Nothing new here that major service cuts , pension reform, worker contracts and higher taxes and / or usage fees seem to be in all of our futures.
One last hysterical note: Donald Trump is now advertising his own name brand mattress through Serta!! Does this guy have any shame??
In steps the new municipal finance expert, Meredith Whitney. In her interview on 60 Minutes she expressed her concerns about possible large scale muni defaults in the coming year. Not just large scale but HUNDREDS OF BILLIONS OF BONDS (rather impossible ). After this interview, munis , which usually put financial writers to sleep due to it's laconic nature, came to be the lead story in every financial report whether in print or on television. Every market pundit on the news shows was asked about muni bonds and their safety. Never mind none of these people had a deep background in the area. So the storm grew to outsized proportions. When Whitney's muni piece came out in the fall, several muni asset managers called her and offered to pay the purported $100,000 price for her voluminous report. She declined. When asked by asset managers and then by Andrew Sorkin of CNBC which municipalities would be high on her list of defaults, she demurred. To quote an old Texas expression"Big hat --No cattle" to describe her. On the CNBC show this past week both Becky Quick and she called BABs "Buy America Bonds" --so much for good investigative journalism and research.
Meredith also said that due to Michigan's restructuring of it's debt to longer maturities that they have defaulted !! So if you took advantage of redoing your mortgage this year , you have defaulted... check your credit scores! It is fairly obvious that she does not understand what an advance refunding is. Here are some quotes from Whitney's interview on 60 Minutes on 12/19/2010:
"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted.
Asked how many is a "spate," Whitney said, "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."
And when discussing rating agencies:
"When individual investors look to people that are supposed to know better, they're patted on the head and told, 'It's not something you need to worry about.' It'll be something to worry about within the next 12 months," she said.
Here is the full script about munis on 60 Minutes.
The CNBC interview this past week finds her stumbling through some of her statements. But what I find most annoying, but is a CNBC trait, is CNBC's need for the headlines and no regard to possible mistruths. Why didn't they invite Bill Gross from Pimco, which probably has more financial analysts on staff that are more erudite on municipal finance , or another well known municipal deity to be across the desk and ask her more questions or rebut her statements? It is these one view looks that send shivers up the public investor's spine. As the week progressed they did interview more people ( John Miller of Nuveen and Mohamed El - Erian of Pimco to name a few) who basically said that there will be some defaults as there are every year but this is an opportunity to buy very good credits at great ratios to government bonds at this stage (see below). Also noted was the fact that these pundits very much disagreed with Whitney's conclusions as to the amount of defaults. A bit late probably. Just remember CNBC still denies it had anything to do with the tech bubble in 1990-2000.....Well enough of being Walter Winchell for the day, let's get back to markets.
This past week started with some trepidation concerning the 2 sizable deals in the market: $875mm NYC Transitional Finance Authority (TFA) (Aa1/AAA/AAA tax supported debt) and $1.9bil NJ Eco Dev Auth for school facilities, a refunding issue of short term debt and swaps ( oops default) (Aa3/AA-/AA- state appropriated debt). As stated above, the market has been nervous about supply after BABs were terminated. Well if last week's performance was any indication, it will be a long year for issuers. With the dearth of long end buyers (TOBs, Hedge funds, cross over buyers, et. al.) since the 2008 meltdown, the long end of the market has struggled at times to perform well vis a vis the shorter end even in the rush to low rates. See curve analysis below. Not only did both deals have to adjust scales to higher levels to get done, NJ had to lower the amount it borrowed to just under $1billion. Just a bit too many bonds to swallow. Along with the lack of buyers on the long end of the market, bond funds have been getting record redemptions for the past 2 months. Add to the mix that the cost of LOCs that are expiring( letters of credit) used on VRDNs has skyrocketed from 5-10 bps when written 3 - 5 years ago to 125 bps and higher in order to renew. Some of this short paper will undoubtedly have to be remarketed further out the curve putting more pressure on fixed rates and at the same time cause a dwindling of short supply for money market funds and keeping short rates low. More curve steepening??
Muni / Treasury ratios Aaa MMD vs Treasuries as of 1/14/2011
5 yr 97.5% normally 70-75%
10 yr 104% normally 78-83%
30 yr 112% normally 88-93%
Muni yield curve 2yr to 30 yr
6/15/2007 70 bps
6/15/2008 233 bps
6/15/2009 372 bps
11/15/2010 380 bps
12/12/2010 404 bps
12/12/2010 404 bps
01/14/2011 433 bps
Going forward the February through May time frame has historically unkind to the rates markets. Look for demand for munis to continue to be soft versus supply and very volatile markets in the near future. A big challenge coming up will be the State of illinois Pension Obligation Bond (POB) taxable deal coming in mid February, Tentative structure is $3.7 billion from 1-8 years. With all the problems the state has been encountering, this will be a mammoth task for the management group to accomplish. The managers will leave no stone unturned in looking for buyers for this debt. Morgan Stanley, Goldman Sachs and Loop Capital are the co senior managers.
The bright light for municipal issuers is the pick up in tax receipts from 2009 to 2010. if this continues this will surely help in toning down the rhetoric about defaults. Nothing new here that major service cuts , pension reform, worker contracts and higher taxes and / or usage fees seem to be in all of our futures.
One last hysterical note: Donald Trump is now advertising his own name brand mattress through Serta!! Does this guy have any shame??
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