The municipal market was busy Tuesday absorbing an onslaught of new supply. But while some new deals saw high demand, others saw concessions.
The secondary market was mostly quiet, a California trader noted, though some sectors within the state saw interest and activity. But retail investors have still been quiet, he added.
“Until a debt limit’s in place and the dialog in Washington calms down, retail investors will hesitate to enter in any major way,” he said. “We’re bracing for a bit more of primary issuance in the coming weeks, which will provide opportunities for people to get into the market at better levels.”
Munis held steady across most of the curve Tuesday, according to the Municipal Market Data scale. Tax-exempts maturing between 2017 and 2018 rose one basis point. The benchmark 10-year tax-exempt yield ended flat on the day at 2.66% for the sixth straight day, 32 basis points beneath its average for 2011. The two-year yield also held a 0.40% yield for a sixth consecutive day, its low for 2011. The 30-year yield remained at 4.32% for a third straight session, 30 basis points under its average for the year.
Treasury yields ended mixed, though the long end of the curve saw a dramatic drop as the afternoon wore on. The 10-year yield fell five basis points to 2.87%. The two-year yield inched up one basis point to 0.38%. The 30-year yield plummeted 13 basis points to 4.18%.
The major equities indexes saw large gains on the day. Each climbed at least 1.63%. The markets Tuesday reflected a late surge in optimism over reported progress made in the debt-ceiling crisis standoff between Republicans in Congress and the White House.
The industry has been watching the primary market closely to gauge how it receives the new issuance. New supply is expected to total $8.27 billion this week, against a revised $5.71 billion last week. If it comes to pass, it will be the largest volume for new debt offerings seen this year in the primary market.
On the day, Morgan Stanley priced $416.8 million of Ohio general obligation refunding bonds in four series. The debt is rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.
Yields for the first series, $184.3 million of common schools GO refunding bonds, range from 0.85% with a 4.00% coupon in 2014 to 3.63% with a 5.00% coupon in 2024. At repricing, yields at the short and long ends of the curve were selectively lowered two basis points.
Yields for the second series, $108.1 million of higher education GO refunding bonds, range from 0.85% with a 4.00% coupon in 2014 to 3.63% with a 5.00% coupon in 2024. Yields at the end of the curve were selectively lowered two basis points at repricing.
Yields for the third series, $98.9 million of infrastructure improvement GO refunding bonds, range from 0.85% with a 4.00% coupon in 2014 to 3.63% with a 5.00% coupon in 2024. Yields at the end of the curve were selectively lowered two basis points at repricing.
Yields for the fourth series, $25.5 million in natural resources GO refunding bonds, range from 0.85% with a 2.00% coupon in 2014 to 3.63% with a 4.00% coupon in 2024. Yields at the end of the curve were selectively lowered two basis points at repricing.
The deal has generated some activity among investors, according to MMD analyst Randy Smolik. “This was the first deal we witnessed ample concessions from yesterday’s retail pricing,” he wrote in his daily commentary. “Most serials were adjusted 10 basis points cheaper.”
Piper Jaffray & Co. priced $259.4 million of Houston Convention Center and Entertainment Facilities Department revenue refunding bonds in two series. The bonds are rated A2 by Moody’s and A-minus by Standard & Poor’s.
Yields for the first series, $119.2 million, range from 1.05% with a 5.00% coupon in 2013 to 5.24% with a 5.00% coupon in 2033. Debt maturing in 2012 was offered in a sealed bid.
Yields for the second series, worth $140.2 million, range from 1.05% with a 5.00% coupon in 2013 to 5.36% with a 5.125% coupon in 2033. Credits maturing in 2012 were offered in a sealed bid.
Moody’s on Tuesday placed on review for possible downgrade the Aaa ratings of Maryland, New Mexico, South Carolina, Tennessee, and Virginia. This follows its July 13 action placing the Aaa government bond rating of the United States on review for downgrade.
Moody’s will assess the ratings of the Aaa-rated states to gauge their sensitivity to sovereign risk. Should the U.S. government’s rating be downgraded to Aa1 or lower, the ratings of these five states would likely be downgraded as well, Moody’s wrote.
If this happens to one or more of those states, no investors will dump their bonds, a trader in New Jersey said. “Well, we’re talking about triple-A rated bonds,” he said. “If they get downgraded to Aa1 or AA-plus, no one’s going to dump those bonds; a Aa1 bond is going to pay its coupon.”
But could the downgrade of one of these triple-A rated states affect future bonds that come to market? Any bond would arrive probably five to 10 basis points cheaper when the state priced the deal, the trader added.
That could add up. Still, it’s highly unlikely that the market would see any bonds dumped out of muni bond mutual funds if Moody’s downgrades any of the aforementioned triple-A states, the trader said.
It’s also good for Moody’s to be proactive and look at what type of monies these states get through the federal government, the California trader said. “It’s smart to put those things on alert so you get some pressure from the states going back to the government to make sure that they get their house in order,” he said.
