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??
Monday, January 17, 2011
Wednesday, December 15, 2010
THE 1 BASIS POINT SOLUTION
Treasuries continued their slide today reaching yields that have not been seen since May. The 10 year sold off to a 3.56 yld ( after an early a.m. rally to a 3.41 yld from a 3.47 close Tuesday) before closing the day at a 3.53. The 3.60 yield is the big support level that will save the slide or if breached let the market continue into the abyss. Munis of course had a ho hum day topped off by a 1 bp cut in MMD to higher yields from 2023-40.....The long treasury bond off over 1 point (6 bps from Tuesday's close) and MMD is cut by 1 bp... please...... in a market such as this NO ONE CAN DETERMINE A 1 BP CHANGE... so if treasuries continue to move towards higher rates MMD will once again be behind the proverbial eight ball.
After NYC raised the issue size of the BAB deal it sold this week, it was forced to downsize the tax exempt deal from $300mm to $109mm due to lack of institutional support in the middle of Tuesday's stunning meltdown. Selling by bond funds was clearly evident again today but was met with a few more bottom fishers trying to buy bonds sold at "sell at any cost" levels. But the number of traders willing to risk capital continues to dwindle. Some bid lists were met with only 1 bid on several items.
As each day goes by there is less access to what little liquidity remains in the marketplace. Most participants believe that January will produce a dearth of issuance and coupled with a large reinvestment, could help the market to get back on a more even keel. Expectations are for a $325 billion tax exempt calendar next year. This will be due to the probable non extension of BABs ( 2010 issuance will be +400 bil). Given the lack of long end buyers since the 2008 debacle, this should give some calm to the muni market and slow the march to higher rates and put us back to more normal ratios between munis and treasuries.
After NYC raised the issue size of the BAB deal it sold this week, it was forced to downsize the tax exempt deal from $300mm to $109mm due to lack of institutional support in the middle of Tuesday's stunning meltdown. Selling by bond funds was clearly evident again today but was met with a few more bottom fishers trying to buy bonds sold at "sell at any cost" levels. But the number of traders willing to risk capital continues to dwindle. Some bid lists were met with only 1 bid on several items.
As each day goes by there is less access to what little liquidity remains in the marketplace. Most participants believe that January will produce a dearth of issuance and coupled with a large reinvestment, could help the market to get back on a more even keel. Expectations are for a $325 billion tax exempt calendar next year. This will be due to the probable non extension of BABs ( 2010 issuance will be +400 bil). Given the lack of long end buyers since the 2008 debacle, this should give some calm to the muni market and slow the march to higher rates and put us back to more normal ratios between munis and treasuries.
Tuesday, December 14, 2010
THE BIG BEATDOWN
Well the bottom finally fell out in the debt markets today. Treasuries were off overnight and never saw the light of day again. Munis soon followed. The 5 yr T finished the day at a 2.06 up from the Monday close of a 1.88. Likewise the 10 yr faded to a 3.47 close (highest yld in 6 months) up 19 bps and the 30 yr to a 4.53 from a Monday close of 4.41. Munis got bludgeoned all day long ending up anywhere from 11-18 bps higher in yield through the intermediate and long end of the curve. Several factors helped the debacle along: stronger economic news - PPI and retail sales higher than expected-, big treasury futures sellers, economic recovery fears and major sellers in the muni market. This combo fueled the fire all day long with no reprieve. But the selloff picked up steam after the FOMC announcement at 2:15. It gave no new news except one important item: it gave a hint that a discussion about whether QE2 should continue took place. The market took this to mean if growth starts to take hold the buy backs in treasuries may end. Sell, Mortimer, sell!!
New muni deals struggled to get done. NYC ditched it's day 2 of retail orders and priced the deal for institutions --turned out to be a good move. Mass GANs were able to navigate the day by adding more yield to the offering for institutions. Long Harvard bonds which were priced a month ago as 5% cpn @ 4.20 yld traded at the end of the day at par!! Harvard happens to be the favorite benchmark bond for MMD. Ten days ago they were offered at a 4.35. The non extension of BABs has really decimated the long end. All in all a very messy day in the tax exempt world. Ratios are still hurting munis as the 2 yr MMD is 97% of treasuries, 5yr 78% (ouch), 10 yr 93% and the 30 yr 107%. Still not good in the shorter end of the market. Buyers will begin to look in the 10-15 year range to get better pricing. And as the longer end fades institutional buyers and the street alike will be looking for bargains from those who must sell.
BABs continue to be in the limelight : no extension leads to the long end of the muni curve to suffer more every day but some large BAB deals continue to get great numbers (NYC G.O.) leaving the smaller lesser known names to become the table scraps and suffer in wider spreads. Some deals continue to delay or postpone. Eventually these issuers will have to bite the bullet and sell. A $400mm Met Water Reclamation District of Chicago -- Aaa credit-- had to postpone and possibly pull the deal late today as it could only garner enough business to sell $250mm at +175 to treasuries. It may forego the BABs route and sell traditional tax exempt bonds in January.When it came a year ago it was one of the darlings and received a low +125 spread. Illinois influence??
As stated in previous blogs, liquidity is the cornerstone of the market. At this time of year liquidity is at a premium and there is not enough to go around for every deal or bid list. This was no more evident today as the bond market got beaten up more and more... liquidity quickly disappeared. Self perpetuating destruction at it's finest. It really is the wrong time of year to have such a big blow off.
New muni deals struggled to get done. NYC ditched it's day 2 of retail orders and priced the deal for institutions --turned out to be a good move. Mass GANs were able to navigate the day by adding more yield to the offering for institutions. Long Harvard bonds which were priced a month ago as 5% cpn @ 4.20 yld traded at the end of the day at par!! Harvard happens to be the favorite benchmark bond for MMD. Ten days ago they were offered at a 4.35. The non extension of BABs has really decimated the long end. All in all a very messy day in the tax exempt world. Ratios are still hurting munis as the 2 yr MMD is 97% of treasuries, 5yr 78% (ouch), 10 yr 93% and the 30 yr 107%. Still not good in the shorter end of the market. Buyers will begin to look in the 10-15 year range to get better pricing. And as the longer end fades institutional buyers and the street alike will be looking for bargains from those who must sell.
BABs continue to be in the limelight : no extension leads to the long end of the muni curve to suffer more every day but some large BAB deals continue to get great numbers (NYC G.O.) leaving the smaller lesser known names to become the table scraps and suffer in wider spreads. Some deals continue to delay or postpone. Eventually these issuers will have to bite the bullet and sell. A $400mm Met Water Reclamation District of Chicago -- Aaa credit-- had to postpone and possibly pull the deal late today as it could only garner enough business to sell $250mm at +175 to treasuries. It may forego the BABs route and sell traditional tax exempt bonds in January.When it came a year ago it was one of the darlings and received a low +125 spread. Illinois influence??
As stated in previous blogs, liquidity is the cornerstone of the market. At this time of year liquidity is at a premium and there is not enough to go around for every deal or bid list. This was no more evident today as the bond market got beaten up more and more... liquidity quickly disappeared. Self perpetuating destruction at it's finest. It really is the wrong time of year to have such a big blow off.
Monday, December 13, 2010
QUICK EARLY WEEK COMMENT
Looks as though munis are in for some rough sledding as yields rose 8 bps in the intermediate and long end of the curve today. Not a lot was happening but from the get go you knew something had to give. The MMD AAA curve gave and probably will continue to do so for a least another day. Pressure from sellers -- not many -- and with treasury rates opening higher had munis running for cover. As the day went on treasuries turned around and ended up in price - lower in yield while munis did just the opposite. News out of DC was not favorable to munis with no BAB extension in sight (at least not yet).
BABs are coming in droves this week and if the announcement that NY MTA will sell $750mm next week is a sign, it appears that this Christmas week could be very busy... highly unusual. Couple that with light staffing and you could have some bargains to buy in the market next week. The MTA announced the deal today and stated that this deal is 45% of it's 2011 new money borrowing... and I bet that rings true with a lot of other issues in the past month. This could mean less issuance in munis next year. That would be a plus in this market environment. Another plus could be a low issuance January with large January reinvest dollars. Just the tonic munis may need to calm the fears.
TREASURY YIELDS RISE IN OVERNIGHT TRADING IN EUROPE
The 10 year treasury yield has risen another 6 bps to a 3.38 yld in Europe in overnight trading. The shorter end of the curve is under some pressure as economists predict growing strength in the world economies for 2011. Munis could be under more pressure as ratios deteriorate. Large calendar.. mostly BABS.. might have to go to higher yields to attract buyers at this time of year. The 5-10 ye range in munis will be very susceptible to this pressure. MMD is behind the curve in yields and could see decent hikes in the short end of the curve.
Sunday, December 12, 2010
THE END IS NEAR....MAYBE
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.....
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.....
Monday, December 6, 2010
The Weeks (s) Ahead
Sunday 12/05
Winging west and using wi-fi on the plane... if you have not read the Sunday NYT there is a very good front page article on the state of states : Mounting Debt by States Stokes Fears of Crisis ...link below http://www.nytimes.com/2010/12/05/us/politics/05states.html?_r=1&ref=us.
Although there is nothing new in the article, being on the front page of the NYT puts it in America's focus. Look for muni deterioration from this article.
But let's talk markets first...the employment number--- +35k vs. + 150k expected made the shorts cover driving the 10 yr treasury from a 3% to a 2.92 and then back again ...virtually unchanged on the day... the long bond fell a point as yields rose about 6bps to a 4.31. The treasury sells the monthly 3's,10's and 30's this week with liquidity becoming scarce. Rates seem poised to go higher in order to clear the auctions. Munis will have a tough time based on percentages and lack of muni buying power this close to year end. Spreads will have to widen from the leaden MMD-- or will there be another drastic change in MMD as the week progresses? If treasuries fall hard then munis should follow.
Back to the article. It discusses avenues the states and municipalities have taken to trim budgets: defer pension payments, trim medicare services, cut police and cut food stamps. The rating agencies are somewhat sanguine about the whole deal saying these entities are still better than similarly rated corporations. Well once late, always late I say. The markets have already begun to pick the winners and losers.. just watch spreads.
Monday 12/06
Here we are Monday morning with the treasury market on the upswing from an up and down day Friday. Currently the 10 yr has rallied to a 2.95 yld from a 3% close. Bernanke announced that the Fed may do more bond purchasing than the original $600 bil. Get ready for the roller coaster ride again. So far it appears as though the street has learned a lesson from the last QE announcement as the treasury market is not rallying too hard in front of the treasury sales this week. Hopefully the street won't get TOO long in the anticipation of a QE3!! It did not turn out too well last time.
Another big calendar in munis this week. $11bil+ lead by BABs. Unless the treasury market stages a big rally as the week goes on tax exempts will slog along and probably give up some ground to find buyers at this time of year. Look for spreads to widen in the BAB world.
Winging west and using wi-fi on the plane... if you have not read the Sunday NYT there is a very good front page article on the state of states : Mounting Debt by States Stokes Fears of Crisis ...link below http://www.nytimes.com/2010/12/05/us/politics/05states.html?_r=1&ref=us.
Although there is nothing new in the article, being on the front page of the NYT puts it in America's focus. Look for muni deterioration from this article.
But let's talk markets first...the employment number--- +35k vs. + 150k expected made the shorts cover driving the 10 yr treasury from a 3% to a 2.92 and then back again ...virtually unchanged on the day... the long bond fell a point as yields rose about 6bps to a 4.31. The treasury sells the monthly 3's,10's and 30's this week with liquidity becoming scarce. Rates seem poised to go higher in order to clear the auctions. Munis will have a tough time based on percentages and lack of muni buying power this close to year end. Spreads will have to widen from the leaden MMD-- or will there be another drastic change in MMD as the week progresses? If treasuries fall hard then munis should follow.
Back to the article. It discusses avenues the states and municipalities have taken to trim budgets: defer pension payments, trim medicare services, cut police and cut food stamps. The rating agencies are somewhat sanguine about the whole deal saying these entities are still better than similarly rated corporations. Well once late, always late I say. The markets have already begun to pick the winners and losers.. just watch spreads.
Monday 12/06
Here we are Monday morning with the treasury market on the upswing from an up and down day Friday. Currently the 10 yr has rallied to a 2.95 yld from a 3% close. Bernanke announced that the Fed may do more bond purchasing than the original $600 bil. Get ready for the roller coaster ride again. So far it appears as though the street has learned a lesson from the last QE announcement as the treasury market is not rallying too hard in front of the treasury sales this week. Hopefully the street won't get TOO long in the anticipation of a QE3!! It did not turn out too well last time.
Another big calendar in munis this week. $11bil+ lead by BABs. Unless the treasury market stages a big rally as the week goes on tax exempts will slog along and probably give up some ground to find buyers at this time of year. Look for spreads to widen in the BAB world.
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