Another day of quiet trading produced few substantial changes in the muni market.
Traders described the secondary market as holding steady while the primary saw yields move up a basis point.
“All the play was all along high-grade paper, but levels were unchanged,” a trader in New York said. “Nothing changed among lesser-grade bonds.”
He described primary market weakness as a follow-through from Monday.
Municipal Market Data showed yields up one basis point for bonds maturing from 2016 through 2034, with all others flat. The two-year note held at 0.44% Tuesday, the 10-year note closed one point up at 2.65%, and the 30-year remained at 4.31%.
“There was a general sense liquidity for the Street was starting to wane for the long holiday weekend,” Randy Smolik wrote in MMD’s daily commentary.
While municipals were steady or modestly selling, Treasuries weakened at the open but finished stronger throughout. The 10-year Treasury closed the day at 3.11%, two basis point lower than Monday’s close and four points lower than in the morning. The two-year yield fell one basis point to 0.51% and the 30-year bond dropped two basis points to 4.25%.
The back-to-back rally in Treasuries helped munis look a bit more attractive: the 10-year muni-Treasury ratio ticked up to 84.94% Tuesday, its highest since May 10. But shorter-term yields might not be too enticing. The five-year muni-Treasury ratio was 67.98%, versus a 12-month average of 82.5%.
Among new issues, JPMorgan once again cheapened its $468.8 million Massachusetts general obligation deal in its pricing for institutional investors, following a two-day retail period that began Friday. The bonds were rated Aa1 by Moody’s Investors Service, AA by Standard & Poor’s, and AA-plus by Fitch Ratings.
Yields in Tuesday’s pricing ranged from 0.52% in 2013 to 3.59% in 2025. Bonds maturing in 2020 were offered at 2.71%, up five basis points from the first retail period. The deal also includes a $6.75 million portion of zero-coupon bonds maturing in 2014, priced at 0.94%. According to co-manager Janney Capital Markets, the deal was offered in $1,000 pieces to reach retail investors.
Bank of America Merrill Lynch brought $250 million of utility system revenue bonds to market for the Lansing Board of Water and Light in Michigan. The bonds were rated Aa3 and AA-minus by Moody’s and Standard & Poor’s, with yields ranging from 1.69% in 2015 to 5.05% in 2037.
“Not much conviction today as Treasury yields are marginally higher and it has been very quiet following last week’s late-week fizzle of performance,” a trader in Chicago said early in the session, adding that he expects underperformance in the seven- to 10-year range.
“This week is shaping up to be a quiet one preceding a holiday,” he added. “We continue to believe that munis will be fairly directional with Treasuries, yet negative macro trends and continued low supply could support the market in the coming weeks.”
Tuesday marked the fourth session in which municipals have failed to rally. The pause — or reversal, depending on your perspective — follows a 27-day trend of steady or rising prices that pushed the 10-year muni yield down as much as 68 basis points from April 11.
While high-grade bonds have been meeting resistance to low-yields, opportunities abound in the high-yield sector, according to Yaffa Rattner, managing director of high-yield municipal analytics at Piper Jaffray, who spoke at a seminar in New York on Tuesday.
Investors were so averse to high-yield bonds during the muni scare of late 2010 that single-A to triple-A municipal spreads blew out to levels more in line with the triple-B to triple-A average, she said.
“You get high compensation and almost no default risk,” Rattner said at a seminar hosted by law firm Venable LLP and Piper Jaffray.
According to MMD data, the average spread for single-A bonds was 112 basis points on Monday ¯compared to its five-year average of 69.3 basis points. In the first half of 2007, before the credit crisis shook the global economy, the average spread was roughly 30 basis points.
Triple-B spreads are currently 201 basis points, versus a five-year average of 149 points. In the first half of 2007, the triple-B spread was just south of 50 basis points.
High yield doesn’t mean defaults; it just means you need to know what you’re buying, Rattner said. She noted crossover buyers were entering the market to take advantage of the yields — indeed, weekly inflows into high-yield funds were up the last two weeks, ending six months of bleeding.
John Dillon, chief muni strategist at Morgan Stanley Smith Barney, made the same point in a recent research note.
“Credit spreads for 10-year A-rated general obligation bonds — versus AAA-rated bonds — now reside above the long-term averages of BBB-spreads,” he wrote. Given that munis have a much lower default rate than corporates, he elaborated via e-mail, the spread on A-rated product is particularly attractive.
Elsewhere in the new issue market, Raymond James priced $57.9 million of water revenue bonds for Alabama’s Cullman Utilities Board. The bonds carry underlying ratings of Aa3 from Moody’s and A from Standard & Poor’s. A credit wrap from Assured Guaranty Municipal Corp. enhanced the ratings to Aa3 and AA-plus. Yields ranged from 1.16% in 2012 to 4.97% in 2041.
Morgan Stanley sold $40.9 million of electric system revenue bonds for the Clark County., Wash., Public Utility District No. 1. The refunding bonds were rated A2 by Moody’s, A by Standard & Poor’s, and A-plus by Fitch. Yields ranged from 1.07% in 2013 to 5% in 2031.
