Amid Equilibrium, Not Too High or Heavy

As much as municipal bond yields have risen over the past 10 days or so, the risk-reward balance reached a sufficient state of equilibrium to generate activity in the primary and secondary markets Thursday.

After the days of sell-offs, prices remain high, traders said, but not too high. And this week, at least, the new supply has been heavy, but not too heavy.

Mostly, though, the market is looking for a bottom for yields, a trader in California said.

“It’s definitely been a much better day,” he said. “But even with that, it’s still kind of tough finding the buyers out there for either market.”

Tax-exempt yields rallied across most of the curve for the first time since Sept. 23. They were unchanged through five years, according to the Municipal Market Data scale. Yields at six years slipped one basis point.

Those from seven to 20 years fell three basis points. Beyond 20 years, muni yields were four basis points firmer.

The benchmark 10-year muni yield actually fell, dropping three basis points to 2.55%. Through Wednesday, it had soared 61 basis points since it held a record low on Sept. 23.

The 30-year yield fell four basis points to 3.71%. The two-year yield held steady at 0.45%.

Treasury yields mostly fell on the day, as well. The benchmark 10-year Treasury yield lost three basis points to 2.18%. Before Thursday, it had soared 43 basis points in six sessions.

The 30-year dropped five basis points to 3.15%. The two-year yield was unchanged at 0.29%.

“Right now, maybe we’ve had enough adjustment in the market, and enough of a backup in the intermediate range — where we’ve been hit a little more — that we’re finding more activity,” the California trader said. “We hope that’s a good sign going forward.”

The industry anticipated a drop in volume in this four-day week. Roughly $6.93 billion was expected, on the heels $8.23 billion last week. The negotiated side has seen the largest new volume.

Primary market deals that have been priced correctly have seen activity, a trader in New York said. Those deals priced to retail have moved. Those that weren’t have been looking for buyers.

In negotiated deals Thursday, Washington State came to market with $1 billion of bonds. They are rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.

The state led with JPMorgan pricing $521 million of motor vehicle fuel-tax general obligation bonds, SR 520 corridor program toll revenue.

Yields ranged from 1.95% with a 5.00% coupon in 2017 to 4.20% with a 5.00% coupon in 2041. Yields in the 10- and 15-year range were seven and three basis points firmer, respectively, at repricing.

JPMorgan also priced $500.4 million of Washington refunding bonds in two series. The amount was initially downsized from an anticipated $772.2 million, but upsized $36 million at repricing.

Yields for the first series, $458.7 million of various-purpose GO refunding bonds, ranged from 0.60% with a 4.00% coupon in 2013 to 3.35% with a 5.00% coupon in 2024. Debt maturing in 2012, in a split maturity, was offered in a sealed bid.

Yields in the 10- and 13-year range were seven and three basis points firmer, respectively, at repricing.

Yields for the second series, $41.8 million of motor vehicle fuel-tax refunding GOs ranged from 0.92% with a 2.00% coupon in 2014 to 3.35% with a 5.00% coupon in 2024. Credits maturing in 2012 were offered in a sealed bid.

Yields in the 10- and 12-year range were seven and five basis points firmer, respectively, at repricing.

The largest deal of the week didn’t slow activity in the secondary market Thursday, according to MMD analyst Randy Smolik. The Washington GO loan was priced at a concession and pared back almost $300 million as the refunding portion was postponed, he wrote in a research post. It arrived at wide spreads to the MMD scale, from plus-38 to plus-37 basis points to implied in five years, to plus-45 basis points for around 15 years and longer.

But this didn’t quell interest for paper in the secondary, Smolik added. Most intermediate and longer high-grade serials appeared firmer by at least two basis points. Wednesday’s deals that priced at wide spreads saw strong markets Thursday. Smolik reported that term issues from Wednesday’s attractive primary loans traded as much as 10 basis points firmer Thursday.

A trader in Florida agreed. In early trading, he saw household names at the back end of the yield curve trading at five basis points better than where they were trading one day earlier. “We understand that [Wednesday’s primary deals] all did very well,” he said. “The indication at this point on some of the deals, like Chicago [Board of Education], Mecklenburg, [N.C.], Virginia GO, and New York [Transitional Finance Authority], is there will all be up-bids as soon as the deals break” in the secondary.

In other deals, Bank of America Merrill Lynch priced $170.1 million of Honolulu city and county wastewater system revenue bonds. The bonds were rated Aa2 by Moody’s and AA by Fitch.

Yields ranged from 1.46% with a 5.00% coupon in 2016 to 4.18% with a 5.00% coupon in 2041.

JPMorgan won the week’s largest deal on the competitive side of the market, at $110.1 million of Lexington County, S.C., School District No. 1 GOs. The bonds were rated Aa1/Aa2 by Moody’s and AA/AA-minus by Standard & Poor’s.

Yields ranged from 0.53% with a 4.00% coupon in 2013 to 3.97% with a 5.00% coupon in 2036. Credits maturing in 2012 were not reoffered for sale.

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