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....
No comments:
Post a Comment