Weekly Market Update: November 13, 2008

Medium/Long-Term Rates: The BBI-20 decreased 10 bp to 5.14%. The 20-year AAA MMD decreased 6 bp to 4.92%. The 10-year Treasury increased 9 bp to 3.84%.

Short-term Rates: The SIFMA Index reset at 1.14%, a 12 bp decrease from 1.26% the previous week. The 1-month LIBOR Index reset at 1.42%, a 35 bp decrease from 1.77% the previous week. The spread between 1-month Treasuries and 1-month LIBOR narrowed by 30 bps to 134 bp, versus 164 bp the previous week.

Commentary: Treasury yields decreased 2 bp on average through the 5-year maturity, and increased progressively from 6 bp to 15 bp at the 30-year maturity. Municipal yields decreased on average by 13 bp through the 10-year maturity and decreased by 4 bp at the 30-year maturity. Municipal to Treasury yield ratios decreased to 104% from 111% for 10-year maturities, and decreased to 120% from 125% for 30-year maturities.

Municipal new issue volume was moderate to full. As has been the case for most of post-election November, new issue supply placed with accentuated strength for general market names with underlying ratings of double-A and higher for maturities within 10 years.

In contrast to past retail demand for high grade names in the short sector, pre-refunded municipal bonds have been trading at 20 bp lower than high grade yields. The market for pre-refunded bonds is unique in three ways: (i) Long-dated advance refundings have greatly curtailed in the past 18 months, resulting in no new supply, continual redemption of existing supply, and thus increasing scarcity, (ii) pre-refunded bonds are exclusively secondary market insofar as all pre-refunded bonds started as primary new issue municipal credits, and (iii) pre-refunded bonds commonly mature in large concentrated amounts.

Crossover buyers seeking both yield and quality supported new issue distribution in longer maturity years up to 25 years. Municipal bond ratings lower than the double-A category, while correlated with high grade yields, continued a gradual widening in spread, however more so in short sector maturities owing to the currently somewhat independent and exuberant short sector high grade market.

Both Treasury and Municipal yield curves exhibited a steepening bias past the short sector range. Both markets are monitoring economic signals and anticipated future supply. Reactions to recessionary versus inflationary signals and concern over future supply can manifest quickly, as shown by Thursday's unexpectedly cautious reception of the 30-year Treasury auction at a 17 bp higher yield than the previous market close.

The coming week new issues calendar is moderate to full. Economic reports include Housing Starts, CPI and Leading Indicators.
 

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