The muni market had a choice Wednesday: follow a new batch of bearish comments from bank analyst Meredith Whitney, or follow the rally in Treasuries. The latter won.
Tax-free yields were firmer across most of the spectrum despite a variety of new issues entering the primary market in one of the heaviest new-issue weeks of 2011.
The yield on the one-year muni note fell two basis points to 0.23% — the lowest in at least three decades, according to Municipal Market Data’s triple-A scale.
The two-year yield held at a calendar-year low of 0.44%, while the 10-year yield fell one basis point to 2.61%, and the 30-year yield fell to 4.25%, according to MMD.
“There’s a little bit of a chase for merchandise,” a trader in California said. “We’ve had a pretty good run and today we’re holding pretty firm.”
The $2.1 billion iShares National Municipal Bond Fund, an exchange-traded fund, finished 0.14% higher on the day at $103.75. Over the last three months the index is now up 4.04%.
The driver for munis Wednesday was clearly Treasuries, where yields were chopped across the board. Longer-term bonds saw the most movement, as 30-year rates fell as much as six basis points even as the taxable market digested a $21 billion auction of 10-year notes.
Money began flooding fixed-income markets late Tuesday after a sober economic assessment from Federal Reserve chairman Ben Bernanke, who called the economic recovery “frustratingly slow” and stuck close to the mantra of loose monetary policy.
While municipals underperformed Treasuries by a notable margin, the California trader said that should be expected given the muni world’s outperformance when Treasury rates were marching up.
“We are seeing money come in from the reinvestment period,” he added, referring to the June and July period when a heavy slate of coupon payments typically gets reinvested into the tax-exempt market. “Institutions have a lot of cash. There’s been strong pricing on new issues this week, particularly on the longer end of the market where cash is seeking a home.”
MMD’s Randy Smolik said appetite centered around high-quality munis with a significant spread to the triple-A curve.
“Perhaps the reason why high-grades were generally stagnant to this point was that customers were looking for more variety and definitely higher yield levels than prime quality paper,” he said.
The benchmark 10-year Treasury yield finished four basis points lower at 2.95%, the two-year yield closed two basis points firmer at 0.39%, and the 30-year yield fell five basis points to 4.20%. The two-year yield hasn’t been this low since Nov. 5, 2010.
As a ton of new deals hit the primary market Wednesday, pricings were described by a New York trader as “really firm,” contrasting with only modest gains in the secondary market.
The easy absorption of a range of deals was notable given that the day began with Whitney defending her call for a spate of massive defaults in the muni market.
Appearing on the cable network CNBC, she said that “the numbers just keep getting worse” among state and local governments, thus giving further validation to her bearish thesis.
In line with recent interviews, she stepped back on the specifics of her original call for hundreds of billions of dollars in defaults in a 12-month period. She instead claimed her research isn’t staked on a precise number of defaults occurring in a specific time period, but that “the sad reality” is “there will be a large number of defaults.”
“It’s my job to be right, so I better be right,” she added.
Criticism from muni professionals was swift. “She aggregates data for all municipal bonds, putting everything they are responsible for in the next 30 years, including pension and health care, and then talks as if it is all due next month or even next year,” Tom Dalpiaz, portfolio manager at Advisors Asset Management, told clients via e-mail. “She refuses to do bottom-up, issuer-specific research in this large, incredibly diversified market, which is what this muni sector generally cries out for.”
Municipal Market Advisors’ managing director Matt Fabian, speaking on a different CNBC segment in the afternoon, said it is more likely to see zero monetary defaults than it is to see massive ones.
“As far as GO defaults and bond defaults, we’ve had none,” Fabian said. “There’s really no reason to think there will be any.”
And the muni team at Deutsche Bank published a new paper, evidently written before her latest appearance: “Giving Whitney the benefit of the doubt and assuming 'hundreds of billions’ refers to just $200 billion, she will need more than $800 million in defaults every single day — including weekends — from May until the end of the year for her prediction to play out.”
Among new deals priced Wednesday, the biggest was a three-pronged $664.8 million sale priced by Citi for Energy Northwest in Washington. Yields on the electric revenue refunding bonds ranged from 1.40% in 2013 to 3.05% in 2018, while yields on the Columbia Generating Station Electric revenue refunding bonds were priced from 3.05% in 2018 to 3.72% in 2021.
Barclays Capital priced $313.6 million of hospital facilities revenue bonds for Ohio Health Corp. via Franklin, Ohio. The bonds carry double-A ratings from all three credit rating agencies and offer yields from 1.13% in 2013 to 5.12% in 2041.
Bank of America Merrill Lynch priced for retail $166.2 million of revenue bonds for the Metropolitan Water District of Southern California. The bonds boast top ratings from Standard & Poor’s, and AA-plus or equivalent ratings from Moody’s Investors Service and Fitch Ratings. Yields range from 0.45% in 2013 to 2.46% in 2020.
In the competitive market, Florida sold $145.2 million of public education capital outlay bonds in two series. The debt boasts AAA ratings from Standard & Poor’s and Fitch, and Aa1 ratings from Moody’s.
Barclays won the larger deal, worth $74.2 million, at a true interest cost of 4.3496%. Yields ranged from 0.35% in 2012 to 4.625% in 2036. JPMorgan won the $71 million portion at a TIC of 3.7301%. The deal matures in 2024 with a 3.42% yield.
