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!!
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