Are municipals (bonds or swaps) headed up or down?

The latest municipal credit default swap index, the MCDX North America rolled over from Series 15 to Series 16 without any changes to the underlying last week. (See here for the constituents).  Citigroup calculated over $1 billion in index notional traded last week during the roll, however, new figures out from the DTC appear to indicate that closer to about $860 million traded.

The MCDX has been on a year-to-date overall tightening (see graph from Markit below) from above 200 basis point to start the year to around 150 bps now. There could, however, be a bit of disconnect between the price action occurring in the municipal CDS market with that of the actual cash bond market. Goldman Sachs postponed, for the second time, what could have been one of the biggest muni bond deals (A $1.275 billion “Liberty” bond deal to fund Larry Silverstein’s New York City’s World Trade Center Liberty Tower 4) earlier this week blaming  market conditions. As mentioned in Bond Buyer:

Yields have risen considerably since the Liberty bonds were first postponed. The Municipal Market Data 20-year yield, for instance, began December at 3.97% and has since risen to 4.39%……

The MMD scale remained steady on all points of the curve Monday.

But the general trend remains one of rising yields, particularly in the belly of the curve.

MMD’s 10-year yield jumped 37 basis points from 2.90% on March 16 to 3.27% on Friday, while the 30-year yield rose 26 basis points to 4.65%.

Most traders believe yields will keep rising, particularly if heavy supply finally returns to the market.

A sampling of some of the highest American municipal CDS prices in the index.

California – 226 bps
Illinois – 216 bps
New Jersey – 149 bps
New York – 98.7 bps

2011 Highs

New Jersey – 223 bps (Jan.10 2011)
New York (State) – 220.5 bps (Jan.10 2011)
Illinois – 358 bps (Jan.6 2011)

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