Yields in the municipal market rose to 21-month highs Tuesday as the expectation that the Build America Bonds program will expire at year's end spurred issuers to bring more of the taxable product to market.
Traders said tax-exempt yields were weaker by about 15 basis points in maturities 10 years and longer as supply outpaced demand, in tandem with a Treasury rout exacerbated by a dovish statement from the Federal Open Market Committee.
"The story today is steepening and cheapening," a trader in New York said Tuesday. "Inside of 10 years, it's not too bad, but past that, we're significantly weaker. On the long end, we're probably down 15 basis points or so. There is just very little demand out there, and those that are in the market are having to sell at concessions."
In Tuesday's biggest deal, JPMorgan priced $1.2 billion of debt for New York City, including $902 million of taxable BABs.
The BABs mature from 2018 through 2024, with term bonds in 2031 and 2037. Yields range from 4.787% in 2018, or 3.11% after the 35% federal subsidy, to 6.271% in 2037, or 4.08% after the subsidy. The bonds were priced to yield between 140 and 250 basis points over the corresponding Treasury yields. They feature an unspecified make-whole call, except for those bonds maturing in 2031, which are callable at par in 2020.
New York City also sold $300 million of Series G and H tax-exempt bonds. Bonds from the $259.4 million Series G mature from 2012 through 2020, with yields ranging from 0.92% with a 3% coupon in 2012 to 3.79% with a 5% coupon in 2020. Yields rose 10 to 18 basis points Tuesday from Monday's retail pricing. These bonds are not callable.
Bonds from the $40.7 million Series H mature from 2011 through 2020, with yields ranging from 0.92% with a 4% coupon in 2012 to 3.79% with a 4% coupon in 2020. Bonds maturing in 2011 were decided via sealed bid. Yields rose 10 to 18 basis points Tuesday from Monday's retail pricing. These bonds are not callable.
Besides its negotiated sale, the city also competitively sold $148 million of taxable GO bonds to Citi, with a true interest cost of 3.37%.
The bonds mature from 2012 through 2017, with yields ranging from 3.17% in 2015 to 4.13% in 2017, all priced at par. Bonds maturing from 2012 through 2014 were not formally re-offered.
The credit is rated Aa2 by Moody's Investors Service and AA by both Standard & Poor's and Fitch Ratings.
The Municipal Market Data triple-A 10-year scale widened 15 basis points Tuesday to reach an eight-month high of 3.24%, the highest level since June 26, 2009; the 20-year scale increased 18 basis points to a 21-month high of 4.51%, the highest since March 31, 2009; and the scale for 30-year debt rose 15 basis points to a 21-month high of 4.69%, the highest since March 27, 2009.
"You have all that BAB supply out there, and quite a bit more to come before the year is out, but right now, we're getting hammered with bid-wanteds and the supply isn't really helping anything," a Los Angeles trader said Tuesday. "None of the deals we've seen today have gotten a great reception as far as I can tell, and that's not likely to change with anything else that's expected this week."
A second New York trader said that market participants are operating under the assumption that the program is dead as of Jan. 1. He attributed Tuesday's sell-off to more than simply an uptick in new issuance ahead of the deadline.
"Supply is part of it, but Treasuries were absolutely routed across the board," the trader said, "and it only got worse after the Fed statement."
In its final meeting of 2010, the FOMC kept its federal funds rate target in a range of 0% to 0.25% and its QE2 Treasury purchase program at a buying pace of $75 billion per month, helping to push rising Treasury yields even higher. The FOMC is the Fed's policymaking body.
In the Treasury market, the benchmark 10-year note finished at 3.44% after opening at 3.27%. The 30-year bond finished at 4.51%, after opening at 4.40%. The two-year note finished at 0.64% after opening at 0.58%.
Tuesday's triple-A muni scale in 10 years was at 93.9% of comparable Treasuries and 30-year munis were at 106.4%, according to MMD. Meanwhile, 30-year tax-exempt triple-A GOs were at 112.8% of the comparable London Interbank Offered Rate.
Elsewhere in the new-issue market Tuesday, Jefferies & Co. priced $388.1 million of special obligation refunding notes for Massachusetts that mature from 2011 through 2015. Yields range from 0.80% with a 2% coupon in 2012 to 1.86% with a 4% coupon in 2015. Bonds maturing in 2011 were decided via sealed bid. Yields rose five to 11 basis points Tuesday from Monday's retail pricing. The bonds are not callable.
Massachusetts is also slated to sell $576.2 million of transportation fund revenue bonds Wednesday in a JPMorgan-led deal. The Series 2010 A accelerated bridge program debt consists of taxable BABs and direct-pay recovery zone economic development bonds.
The credit is rated Aa1 by Moody's. AAA by Standard & Poor's, and AA-plus by Fitch.
