Amid a rallying Treasury market and weaker-than-expected economic data, municipal yields plunged to record-low levels Tuesday, picking up a streak of new lows this month interrupted only by Monday’s flatness.
Traders said tax-exempt yields were lower by five to seven basis points overall, following surging Treasuries, and while $7.8 billion of Texas tax and revenue anticipation notes were sold in the competitive new-issue market.
“It’s become sort of a how-low-can-you-go thing with munis right now,” a trader in New York said. “Certainly what’s gone on in Treasuries today has helped, but the main issue here is that there’s just a lot of demand for tax-exempt paper right now. On a relative value basis, munis are very attractive. Problem is, there’s not much supply left, and if things don’t change, we’re going to reach a point where yields hit a wall and start going the other way.”
The Municipal Market Data triple-A scale yielded a record-low 2.23% in 10 years and 3.34% in 20 years Tuesday, also a record low, following 2.29% and 3.39% Monday. The scale yielded an all-time low of 3.70% in 30 years Tuesday, following 3.75% Monday.
Though yield levels were unchanged Monday, Tuesday’s levels mark the 11th all-time low in 10-year munis set in the past 13 sessions. Also, 20- and 30-year tax-exempts reached record lows for the third time in four sessions.
Tuesday’s triple-A muni scale in 10 years was at 89.6% of comparable Treasuries and 30-year munis were at 104.2%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 115.6% of the comparable London Interbank Offered Rate.
A dozen municipal bond exchange-traded funds, representing 43% of the muni ETF industry’s $7.8 billion in assets, hit 52-week highs Tuesday.
Muni ETFs strive to replicate the returns on a target index, offering a theoretical real-time proxy for investors’ assessment of where municipal indexes are heading. ETFs hitting annual highs today include two funds tracking Build America Bonds, funds following the Barclays Capital AMT-Free Long Municipal and the Barclays Capital Municipal Managed Money Indexes, two short-term indexes from Barclays and Standard & Poor’s, and three Standard & Poor’s indexes tracking bonds maturing respectively in 2014, 2015, and 2016.
The Treasury market rallied Tuesday on heightened concerns about the economy, following much weaker-than-expected economic data. The benchmark 10-year note finished at 2.49% after opening at 2.60%.
The 30-year bond finished at 3.55% after opening at 3.66%. The two-year note finished at 0.47% after opening at 0.48%.
The Treasury Department today auctioned $37 billion of two-year notes with a 3/8% coupon at a 0.498% yield and a price of 99.76. The bid-to-cover ratio was 3.12. The Federal Reserve banks also bought $905.9 million for their own account in exchange for maturing securities.
In the new-issue market Tuesday, Texas competitively sold $7.8 billion of Trans to various bidders, including Morgan Stanley and Wells Fargo Securities. The notes, which mature in August 2011, were sold with a weighted average net interest cost of 0.34%.
It is the largest Tran issue in Texas since a $7.4 billion offering in 2003. The coupon was set at 2%. In total, Texas received 79 bids totaling $27.4 billion, ranging from 0.30% to 0.51%. Other winning bidders included Goldman, Sachs & Co., Citi and JPMorgan.
The notes are rated MIG-1 by Moody’s Investors Service, SP-1-plus by Standard & Poor’s, and F1-plus by Fitch Ratings.
In the long-term market, JPMorgan priced and repriced $525.6 million of revenue bonds for the Southern California Public Power Authority.
The bonds mature from 2011 through 2030, with yields ranging from 0.45% with a 3% coupon in 2012 to 3.74% with a 5% coupon in 2030, dropped from an initial 3.77%. Other maturities from 2022 to 2029 were adjusted, with some moving up one or two basis points and others down. Bonds maturing in 2011 were decided via sealed bid.
The bonds, which are callable at par in 2020, are rated AA-minus by both Standard & Poor’s and Fitch.
JPMorgan also priced $289.3 million of taxable pension obligation bonds for Sonoma County, Calif.
The bonds mature in 2010, from 2013 through 2018, and in 2029. Yields range from 0.555% in 2010 to 6.00% in 2029, all priced at par. The bonds were priced to yield between 40 and 185 basis points over the comparable Treasury yields.
The bonds, which contain an unspecified make-whole call, are rated AA-minus by Standard & Poor’s and AA by Fitch.
RBC Capital Markets priced $212.6 million of combined utility system first-lien revenue bonds for Houston.
The bonds mature from 2011 through 2019, with yields ranging from 0.40% with a 2% coupon in 2011 to 2.48% with a 4% coupon in 2019.
The bonds, which are not callable, are rated Aa2 by Moody’s, AA by Standard & Poor’s, and AA-minus by Fitch.
In economic data released Tuesday, existing home sales fell by a record 27.2% in July to a seasonally adjusted annual rate of 3.83 million units, the lowest sales pace since 1995. Economists polled by Thomson Reuters expected 4.70 million existing home sales.
Diane Swonk, chief economist at Mesirow Financial wrote in a note to investors that the “bottom line is the economy is weak, and flirting with a double dip.”
“Without a more demonstrative pickup in growth in the next few weeks, the [Federal Reserve] could be back in the game of buying assets soon, regardless of dissent in its ranks,” she wrote. “The next [Federal Open Market Committee] meeting is scheduled for Sept. 21, 2010, and it is likely to be a market-moving event.”
Dan Seymour contributed to this column.
