An upsurge in retail activity in an otherwise quiet day marked a bright spot in the municipal market as it emerged from a week of selling.
Retail investors have long been wary of uncertainty. But they responded well on the day, participating in activity that steadied the market, a trader in California said.
“There’s probably a more constructive tone to the market,” he said. “We’re starting to get more hits from retail than we had all last week. There was panic then. It has helped stabilize the bid, particularly in the 10-year range. These price cuts that have since Sept. 23 chopped almost 60 points on MMD are bringing retail into the market.”
The retail market has also cottoned to seeing more 5.00% coupons on the long end return to the market recently, the trader added. The number represents a psychological trigger for them.
“When retail can get 5.00% on a discount or at par, with their commission on an A-rated bond, or better, they come in,” he said. “It’s a good historical average, when they do 5.00%. And seeing more retail business makes everyone a little more comfortable.”
Tax-exempt yields did not follow Treasuries on their steep ascent to weaker yields, according to the Municipal Market Data scale. They were steady through 22 years, and one basis point higher for yields in 2034. Beyond that, they pushed up two basis points.
The 10-year muni yield rested for a second consecutive session. It was steady on the day at 2.55% and has surged 58 basis points since it sat at a record low on Sept. 23.
The two-year yield also held on the day at 0.43%. The 30-year yield rose two basis points to 3.73%.
Treasury yields started out of the gate flat, but they took to the air shortly thereafter. The benchmark 10-year Treasury yield jumped nine basis points to 2.16%. The 30-year leapt 10 basis points to 3.11%. The two-year yield inched up a basis point to 0.31%.
The industry anticipates a drop in volume this week. Roughly $6.93 billion is expected on the heels $8.23 billion last week.
The bulk of deals in this holiday-shortened week are negotiated. The competitive market anticipates a quiet four days.
Some of this week’s largest deals priced for retail Tuesday. And though the tax-exempt calendar is large, MMD analyst Randy Smolik wrote in a market post, there were no major surprises in the retail pricings of the day’s major issues.
One deal gave an idea of where the market was. Bank of America Merrill Lynch priced for retail $508 million of New York Transitional Finance Authority bonds.
Pricing details weren’t available, but Smolik reported yields at certain points along the curve for November 2015 through 2024.
“With spots of 1.71% in November 2016 and 3.00% in November 2021, the bonds were plus-40/plus-45 basis points to current MMD,” he wrote.
Investors are looking to the week’s large offerings to get a sense of whether last week’s sell-off has passed or will continue. But there was too little activity on the day’s session to properly gauge where prices should be.
Market participants will look toward deals from the Chicago Board of Education, the New York TFA, and the California State Public Works Board to get a temperature of demand, a trader in New Jersey said.
“We need to get some pricings in the market before we can see what the appetite is right now, and how well the market will be supported,” he said. “With the sell-off we’ve had in our market, it seems as though retail is supposed to be paying attention right now.”
In the negotiated market, JPMorgan priced for retail $420.7 million of Catholic Health Initiatives in two series. The bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
Yields for the first series, $314.7 million of Colorado Health Facilities Authority revenue bonds, ranged from 1.35% with coupons of 3.00% and 5.00% in a split maturity in 2014 to 4.85% with coupons of 4.75% or 5.00% in a split maturity in 2033. Credits maturing in 2013 were offered in a sealed bid. Those for 2031 and 2041 were not offered to retail.
Yields for the second series, $106 million of Washington Health Care Facilities Authority revenue bonds, ranged from 1.35% with a 4.00% coupon in 2014 to 4.90% with a 5.00% coupon in 2036. Credits maturing in 2013 were offered in a sealed bid. Those maturing in 2041 were not offered to retail.
Muni yields have failed to keep pace recently with those of Treasuries, and it appears that market drivers lie behind the disparity, Morgan Stanley Smith Barney chief muni bond strategist John Dillon wrote in a recent report.
For one, the global flight to quality didn’t involve munis — foreign buyers have little use for the U.S. tax exemption. Likewise, traditional muni bond buyers may not rush to Treasuries during uncertain market conditions, Dillon wrote. But the issue also involves muni ratios to Treasuries.
“We have now reached a point of elevated relative value not experienced since early 2009,” he wrote. “The real question for today’s market is: Does it matter? We believe that it does, and also that there is ample evidence that a certain degree of catch-up transpired in the wake of each significant and sustained Treasury price advance (lower yields) … though the success rate of municipals in closing the gap has been waning as of late.”
As individual investors, either via direct holdings or through mutual funds, dominate the market, relative value relationships have seen higher highs and higher lows, Dillon wrote.
This is because investors face the predicament of tax-exempts that are absolutely rich and relatively cheap simultaneously. And for months now, absolute yield levels have trumped relative value, with persistent muni yield underperformance against Treasuries.
“But the story is far from over,” Dillon added. “Given the outsized relative value that exists in today’s municipal market, an inspection of various market metrics and historical norms leads us to conclude that, on a pure relative-value basis, upside opportunity dwarfs downside risk in all but the five-year maturity (which still favors upside, but not materially).”
