Municipals close out week on a positive note; volume drops dramatically ahead of holidays

By Sheri Kasprzak

New York, Dec. 16 - Municipals rounded out the week on a positive note as the market prepared to take a rest ahead of Hanukkah and Christmas, said market insiders. The secondary market has been busy with traders looking to sell off bonds ahead of year's end, said one trader.

"There's been a lot of selling," he said.

"Everyone's trying to sell before the holidays. There's been a big push as the close of year approaches."

The belly of the curve once again saw the most improvement on the day, with seven-year yields seen lower by more than 9 basis points and 10-year yields down by almost 4 bps.

Less than $1 billion of new issues, both in the competitive and negotiated markets, are expected in the week ahead, with the Hanukkah and Christmas holidays expected to keep investors and issuers alike out of the market, said the trader. Comparatively, about $3.5 billion of new issues hit the market during the week just ended.

Meanwhile, California released an updated revenue forecast, said Alan Schankel, managing director with Janney Montgomery Scott LLC. The fiscal-year 2012 forecast was revised to $86 billion, $2 billion below earlier projections, Schankel said.

"This recent forecast triggered $981 million in planned and approved midyear budget cuts intended to partially offset the emergence of a midyear gap, though these automatic spending reductions might come under legal scrutiny," Schankel said.

Munis continue to outperform

Elsewhere, J.R. Rieger, vice president of fixed-income indexes with Standard & Poor's, said Friday that the municipal bond market outperformed many others during the year.

"The relative high quality and diversification seen in the municipal bond market has created an avenue for investors seeking safety, less volatility and comparably good yields," Rieger wrote in a report released Friday.

"Municipalities do face this difficult and long economic cycle, but there simply hasn't been the tidal wave of defaults that were predicted by some analysts going into 2011."

Rieger wrote that the weighted average yield of bonds in the S&P National AMT-Free Municipal Bond index, which tracks investment-grade, tax-exempt bonds, hit a record low of 3.37%, surpassing a low last seen in August 2010.

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