Municipal bonds firmed up to six basis points in the belly of the yield curve Thursday, as tax-exempts continued to react to a Federal Reserve policy announcement a day earlier.
Trading was described as moderate overall. However, trading was particularly active in the five- to seven-year range where the Fed will be concentrating Treasury purchases under its expanded $600 billion quantitative easing plan.
"Based on what the Fed is doing as far as buying bonds, our market is trying to represent that we're going to correspond with them on the short-end," a trader in New Jersey said. "The trouble is, yields are so darn low right now in munis that you have to go out past five years to get anything well above 1%. So, I think retail is still going to have a difficult time."
While yields were unchanged at the short end, triple-A yields shed three to six points for bonds maturing from 2014 to 2025, according to Municipal Market Data. The triple-A rated 10-year note strengthened five basis points to 2.46% Thursday while the triple-A two-year noted remained at 0.46%. The 30-year yield remained at 3.90%.
A trader in New York said intermediate-range munis were following the strength of the 10-year Treasury, which fell 13 basis points to a four-week low of 2.49%.
In the new-issue market Thursday, JPMorgan priced $588 million of airport general revenue bonds for Atlanta. The funds are being used to expand the international terminal at Hartsfield-Jackson Atlanta International Airport — the world's busiest airport. About $300 million of the deal was sold in a retail period Wednesday, according to a source at the senior underwriter.
The bonds were priced in two series. The first was for $178 million of general revenue bonds.The underlying ratings are A1 from Moody's Investors Service and A-plus by Fitch Ratings. Maturities ranged from 2014 to 2024, with yields from 1.63% to 4.09%. The deal also featured more than $50 million of longer-term bonds wrapped by Assured Guaranty Municipal — including $20 million in 2035 and $30 million in 2040. The insured bonds carried enhanced ratings of Aa3 from Moody's and AA-plus from Standard & Poor's. Fitch no longer rates insured bonds.
A second series of passenger facility charge and subordinate lien general revenue bonds, totaling $409 million, offered maturities from 2013 to 2026, with yields ranging from 1.35% to 4.38%. These bonds are rated A1 by Moody's and A by Fitch
Elsewhere, Morgan Stanley offered a final pricing for $391 million of general obligation Build America Bonds for Rutgers University. The taxable bonds are rated Aa2 by Moody's and AA by Standard & Poor's. Maturities between 2019 and 2022 offered yields from 3.776% to 4.376%. Bonds maturing in 2029 yielded 5.545% and bonds maturing in 2040 yielded 5.665%. The 2022 maturity offered the greatest value versus comparable Treasuries with a 180 basis point spread.
BABs could account for 40% of new issuance in the final months of 2010, according to John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney. This run of new supply — which Dillon calls a "BABathon" — should cause taxable yields to move higher and could "present a window of opportunity to purchase the federally taxable municipal product at compelling spread levels versus similarly rated corporate bonds," he said.
In the secondary market, a retail-oriented trader from San Diego said he's been receiving calls from clients seeking to unload paper backed by Ambac Assurance Corp. The insurer's parent, Ambac Financial Group, announced Monday it was on the verge of bankruptcy.
"A lot of individual customers are seeing the news out there and noticing they have Ambac-backed bonds in their accounts, so they're trying to sell them," he said.
Ambac-wrapped paper tend to trade on the underlying credit rather than the junk-rated "enhanced" level, but the San Diego trader said retail investors are less confident about the underlying values as well.
"Clients have seen the increasing chatter of municipalities, and they're starting to get nervous," he said.
The San Diego trader added that equities are looking increasingly attractive in this climate. After the Dow hit a two-year high Wednesday, the rally extended another 219 points Thursday to end at 11,435 — the highest level since Lehman Brothers crashed.
Among Treasuries, the two-year note yield was unmoved at 0.34%, while the 30-year bond moved two basis points lower to 4.04%. Long-term Treasury bonds ran up Wednesday in anticipation of the Fed statement but quickly shed the gains once it became clear the Fed would not be buying much long-term product in its expanded program of quantitative easing.
The Fed intends to purchase $600 billion of Treasury assets by mid-2011. But just 4% of the purchases will be in the 17-30 year range, according to the Open Market Trading Desk, which conducts the operations. Nearly two-thirds of the purchases will be in the 2.5 to 7-year range.
Elsewhere in the new-issue market, JPMorgan priced $132 million of tax-exempts for the Chicago Park District. The bonds were rated Aa2 by Moody's, AA-plus by Standard & Poor's, and AAA by Fitch. Maturities were offered in 2013, from 2015 through 2030, and in 2033, 2037, and 2040. Yields ranged from 1.04% in 2013 to 4.72% in 2040.
