A slight municipal market flummoxed traders Wednesday and kept them guessing.
Light supply in the primary found a ready audience, but little in the way of desirable blocks in the secondary caused traders to reach.
"It's like throwing darts at a board," a trader in Chicago said of the secondary market. "Certain names are trading through their usual levels because there's nothing around like them — names we don't see much. Yet some of the names we see a lot are trading at market or below their market levels. So, it's a weird market. I sold some things I didn't think I'd sell; I'm long some things I thought I would sell. At the end of the day, the market tells you if you were right or wrong."
Muni yields remained steady in various spots along the curve, according to the Municipal Market Data scale. Yields for maturities between 2016 and 2020 rose one basis point. The same goes for those from 2036 to 2041. Yields for debt maturing in 2025 and 2026 fell one basis point.
The two-year yield held to end the day at 0.42% for the 17th straight session. Prior to the streak, it had hovered at 0.44% for 17 consecutive sessions.
The benchmark 10-year muni yield remained at 2.76% for a third straight day. The 30-year yield inched up one basis point to 4.37%. Treasury yields fell, rose and then fell again to end the day lower. The 10-year yield ended the session down three basis points to 3.10%.
The two-year slipped a basis point to 0.43%. The 30-year yield fell three basis points to 4.36%.
Dealers haven't been active in the secondary market of late. They have been sitting with high-grade purchases for a while — particularly from last month's massive Georgia deal — in the short and intermediate range, according to MMD analyst Randy Smolik. They held fast because they weren't anxious to chase any fleeting bids last week when Treasuries were getting hammered.
"But they were flexible with offerings yesterday and today to take advantage of increasing bidding interest as Treasuries staged another day of lower yields," Smolik wrote.
Some ratios to Treasuries aren't quite where traders want them to be. By the end of June, the 10-year muni was at 87% of Treasuries, according to MMD numbers. The average for the past month or so was about 88% of Treasuries.
That's not considered cheap, according to a trader in New Jersey whose firm has been tracking 10-year ratios. But he won't say it's very rich until they get below 85%.
But at an 87% ratio, there's no perceived value in munis versus Treasuries, he added. In January, ratios for 10-year munis versus Treasuries were at or higher than 100%. On a relative basis, the trader said, munis tend to be somewhat rich at present. When more supply arrives, they will start to see some continued weakness.
Traders have been searching for value, the Chicago trader said. Some are paying up for double-A paper that generally trades at a wider spread because they feel they can pick up a little more percentage to Treasuries, he said.
"But traders generally stay consistent," he added. "When you start reaching, you get in trouble. We all do it because we feel the heat from the market to be involved, and we want to be involved. Because there's not a lot of really great stuff in the secondary, as far as blocks go, people start to reach in areas where there's not many; sometimes it works and sometimes it doesn't."
The holiday-shortened week has seen an anticipated drop in issuance. Issuers expect to sell an estimated $1.3 billion of munis this week against a revised $8.2 billion that was sold last week.
In negotiated sales, RBC Capital Markets priced for retail the week's largest offering, $372.4 million of general obligation bonds for the San Diego Community College District, in four series. The bonds were rated Aa1 by Moody's Investors Service and AA-plus by Standard & Poor's.
Yields for the first series, $22.4 million of GO refunding bonds, range from 0.38% with a 2.00% coupon in 2012 to 3.55% with a 5.00% coupon in 2023.
Yields for the second series, $84.4 million of election 2002 GO current interest bonds, range from 0.58% with a 2.00% coupon in 2013 to 4.68% with a 4.625% coupon in 2033. Credits maturing in 2012 were offered in a sealed bid. Bonds in the series maturing from 2027 through 2031 were not offered for retail.
The third series, $15.6 million of capital appreciation bonds, has a yield to maturity of 6.71% in 2034. Debt in the series maturing from 2035 to 2041 was not offered to retail investors.
Yields for the fourth series, $250 million of current interest bonds, range from 0.58% with a 3.00% coupon in 2013 to a pricing at par with a yield and coupon at 4.80% in 2036. Bonds in the series that mature in 2012 were offered in a sealed bid. Credits in the series that mature in 2041 were not offered for retail.
JPMorgan priced for retail $236.2 million of waterworks and sewer system revenue refunding bonds for Dallas. The bonds were rated Aa1 by Moody's and triple-A by Standard & Poor's.
Yields range from 0.56% with a 3.50% coupon in 2013 to 4.75% with a 4.625% coupon in 2040.
Morgan Stanley priced $105.4 million of Lubbock, Texas, Health Facilities Development Corp. refunding revenue bonds for the St. Joseph Health System. The bonds were rated A1 by Moody's and AA-minus by Standard & Poor's and Fitch Ratings. Yields range from 1.25% with a 5.00% coupon in 2013 to 4.36% with a 4.25% coupon in 2023. Debt maturing in 2012 was not reoffered.
By early afternoon, both the San Diego and Dallas deals had received a strong reception and were expected to roll into the institutional period, according to a trader in San Francisco. "The new deals are pricing well," he said.
