U.S. debt-ceiling fears have taken many municipal market participants off the field.
Investors spent Tuesday largely wary of the growing uncertainty resulting from Washington’s inability to resolve the approaching debt-limit deadline. The muni market on the day saw small primary deals, moderately received bid-wanteds in the secondary, and loads of cash resting on the sidelines.
“Overall, it was a day of fairly slow trading, probably stable, on very low volume,” a trader in California said. “We still haven’t seen that money from retail coming into the market from the sidelines, and I don’t blame them. If you think that the Treasury might not be triple-A and wonder what the effect could be on the other fixed-income instruments, you need to sit on the sidelines.”
Muni yields reflected this uncertainty, as they were mixed throughout the curve Tuesday, according to the Municipal Market Data scale. Bonds maturing in 2014 and 2015 were two basis points lower. Maturities between 2022 and 2031 were one basis point higher. The rest of the curve remained unchanged.
The benchmark 10-year tax-exempt yield held steady Tuesday at 2.68% for a fourth consecutive trading session. The two-year yield hovered once again at its low for the year, 0.40%, for a 11th straight session. The 30-year yield remained unchanged for a second session at 4.35%.
Treasury yields were firmer across the curve on the day. The 10-year yield dropped five basis points to 2.96%.
The 30-year yield fell three basis points to 4.29%. The two-year yield also decreased three basis points to 0.40%.
The market has so far watched the week’s primary issuance with one eye toward the rapidly approaching debt-ceiling deadline. It expects roughly half the amount of new issuance it saw last week. About $4.1 billion in new deals is expected, after $8.3 billion came to market last week, the largest volume for new debt offerings in 2011.
In negotiated deals, Jefferies & Co. priced $282.8 million of Texas Public Finance Authority taxable general obligation and refunding bonds. The bonds were rated triple-A by Moody’s Investors Service and Fitch Ratings, and AA-plus by Standard & Poor’s. Yields range from 0.716% with a 3.00% coupon in 2013 to 5.116% at par in 2031. Credits maturing in 2012 were not formally re-offered.
Stifel, Nicolaus & Co. priced for retail $252.6 million of Columbus, Ohio, GO limited- and unlimited-tax bonds in two series. The bonds are rated triple-A by the major rating agencies.
Yields for the unlimited-tax series, at $189 million, range from 0.20% with a 2.00% coupon in 2012 to 3.91% with a 3.75% coupon in 2029. Yields for the limited-tax series, at $63.6 million, range from 0.20% with a 2.00% coupon in 2012 to 3.73% with a 3.625% coupon in 2027.
Citi priced $202.5 million of East Baton Rouge Sewerage Commission revenue bonds in two series. The bonds are rated Aa3 by Moody’s, AA-minus by Standard & Poor’s, and AA by Fitch.
Yields for the first series, at $10.3 million, are priced at par. Yields for the second series, at $192.2 million, are also priced at par.
Bank of America Merrill Lynch priced $100.1 million of North Dakota Public Finance Authority state revolving fund program bonds. The bonds are rated Aaa by Moody’s. Yields range from 0.49% with a 3.00% coupon in 2013 to 4.08% with coupons of 4.00% and 5.00% in a split maturity in 2031. Debt maturing in 2012 was offered in a sealed bid.
There has been much talk over the summer of the June-July reinvestment period. Loop Capital Markets strategist Chris Mier in a recent research report took a closer look at how much impact the summer cash-flow reinvestment represented, and whether it’s large enough for muni market participants to take advantage of it.
Issuers pay coupons, call bonds, pay off maturing bonds, and make sinking-fund payments during these two months to a greater extent than at any other time of the year. Most of this money flows back into the muni market, Mier wrote, as “idle cash exacts a competitive cost for portfolios not fully invested.” This is particularly accurate for retail municipal investors, as most are encouraged to compound the tax-exempt income flow by reinvesting back into munis.
“Dealers, sellers and issuers stand to gain from this buying activity, particularly if the supply in the new-issue market is down, as it is this year,” Mier wrote.
Loop’s analytical services division devised a model that showed how, ultimately, the June-July reinvestment money leads to a five-basis-point change in 10-year muni yields.
“This change is slightly larger than the bid to offered spread in the muni market, roughly three or four basis points,” Mier wrote, “indicating that the summer cash-flow effect is big enough to enable opportunistic sellers of muni bonds to do so profitably, but only marginally.”
In economic news, homes sales saw a mixed picture, but mostly more negative news. Prices for the 10- and 20-city composites were up 1.1% and 1.0%, respectively, in May over April, according to the S&P/Case-Shiller Home Price Indices, which Standard & Poor’s released Tuesday. It was the second consecutive month of increases in prices for the 10- and 20-city composites.
But the Commerce Department reported Tuesday that new home sales fell 1.0% to a 312,000 annual rate in June on a seasonally adjusted basis, though sales were up 1.6% from June 2010.
Economists polled by Thomson Reuters expected a higher number for June sales. Sales in May were revised downward to 315,000 from the 319,000 initially reported.
