Munis Hang In There as Treasuries Slip a Bit

Tuesday was the equivalent of an easy, slightly breezy late-summer evening for the municipal market.

Primary market pricing was strong overall, while the secondary saw moderate activity and muni yields outperformed Treasuries.

“We held in there and had a good day as Treasuries started to slip,” a trader in New York said. “We saw a much stronger longer-intermediate range, or between eight and 15 years.”

Tax-exempt yields once again firmed across all but the front of the curve Tuesday. Yields were unchanged to two years, according to the Municipal Market Data scale. From three to seven years, they were two to six basis points lower.

Yields from eight to 21 years were seven to nine basis points lower. Beyond 21 years, they were down two to six basis points.

The benchmark 10-year muni yield dropped eight basis points Monday to 2.45%. It sits 48 basis points above the record low it held on Sept. 23.

The 30-year yield fell two basis points to 3.69%. The two-year yield remained unchanged at 0.45% for a fifth consecutive session.

Treasury yields started the day somewhat firmer only to surrender their gains in the afternoon and end weaker. The benchmark 10-year Treasury yield ended a volatile session up one basis point to 2.18%.

The 30-year followed the same trajectory, ending the day three basis points higher at 3.17%. The two-year yield ticked up one basis point to 0.28%.

The industry estimates the municipal bond market should see $6.7 billion in new issuance this week. Last week’s number was revised downward to $4.5 billion.

Three deals in particular, two negotiated and one competitive, are expected to provide a large block of the volume.

In the negotiated space, Goldman, Sachs & Co. paced 28 other firms on pricing for a second day of retail on $1.8 billion California general obligation bonds. The bonds, rated A1 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch Ratings, are expected to drive the market this week.

Pricing levels for the second day of the retail order period mirrored those of the first. Yields ranged from 1.15% with coupons of 3.00% and 4.00% in 2014 to 4.87% with coupons of 4.75% and 5.00% in 2041. Debt maturing in 2025, 2027, 2028, and 2029 was not offered to retail.

Retail took about 12.5% of the issue in orders Monday. Traders surmised that retail investors’ attention focused more on the struggles in the equities markets.

One trader in the state not involved with the deal said the California GOs have been priced through where one can buy bonds in the secondary.

So, he added, for retail investors, that means unless one has to have a specific maturity that’s not available in the secondary, there’s no reason to buy the California GOs.

The deal is effectively competing with what’s available in the secondary. “So, either the secondary gets cleaned up in the competing maturity — leaving this the only game in town — or there’s going to have to be some kind of price adjustment,” he said.

JPMorgan priced $170 million of Jefferson Parish, La., Hospital Service District No. 2 revenue and refunding bonds for the East Jefferson General Hospital. The bonds were rated Baa2 by Moody’s and BBB-minus by Standard & Poor’s.

Yields ranged from 2.15% with a 2.00% coupon in 2012 to 6.50% with a 6.375% coupon in 2041.

Meanwhile, Bank of America Merrill Lynch priced $108 million of District of Columbia revenue bonds for the Association of American Medical Colleges. The bonds were rated A-plus by Standard & Poor’s and A by Fitch.

Yields ranged from 1.97% with a 4.00% coupon in 2015 to 5.25% with coupons of 5.00% and 5.25% in a split maturity in 2041. Yields in the short and intermediate ranges rose five basis points from those in the retail period earlier in the day. They rose 20 basis points at the 15-year range and 24 basis points at the 25-year range over the same period.

In the competitive market Tuesday, Citi won $815.8 of Pennsylvania GOs in two series. It represents the largest deal in the competitive market this week, and one of the three deals pacing the market. The bonds are rated Aa1 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch.

Yields for the first series, with $650 million, ranged from 0.77% with a 4.00% coupon in 2014 to 4.00% priced at par in 2031. Credits maturing in 2012 and 2103 were not reoffered.

Yields for the second series, with $165.8 million, ranged from 0.30% with a 2.00% coupon in 2012 to 2.72% with a 5.00% coupon in 2022.

Underwriters made aggressive bids for the Pennsylvania GOs, MMD analyst Randy Smolik wrote in a research post. In this light, the primary market provided the requisite leadership to keep trading in the intermediate range strong.

Citi bought the Penn GO loan with spreads for maturities between 2015 and 2025 at plus-eight basis points to MMD — with the exception of the 2021 maturity, at plus-10 basis points, Smolik wrote.

Spreads for 5.00% coupon structures from 15 years and longer were just plus-five or six basis points from MMD.

“We were hearing success around the 20-year and 10-year areas,” he wrote. “Competing accounts talk of good orders mostly around plus-10 basis points levels.”

Treasuries likely reacted to growing investor interest in the equities markets. The stock market picked up steam as the day continued.

The major indexes all finished higher by at least 1.58%. The Dow Jones Industrial Average ended the day 180 points higher, erasing a chunk of Monday’s losses.

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