Longer-dated tax-exempt credits weakened Tuesday as munis followed Treasuries. Muni yields rose on the long end, though less so than Treasuries, which saw a sell-off when Italian Prime Minister Silvio Berlusconi announced plans to resign.
“Overall, it was a relatively stable market,” a trader in Los Angeles said. “Prices are settling in and spreads are settling in.”
“Supply is lighter this week and more manageable,” the trader said, adding that he helped price $79 million of California’s West Contra Costa Unified School District bonds that “were well received.” He noted California traders are keeping their eye on the San Francisco general obligation bond deal coming in the competitive market Wednesday.
Tax-exempt yields rose throughout the day. By Tuesday’s close, muni yields were up between one and three basis points, according to the Municipal Market Data scale. Yields on credits maturing between 2026 and 2029 increased one basis point while yields rose two basis points for credits maturing between 2030 and 2032. Yields jumped up three basis points for credits maturing after 2033. Yields were flat inside the 14-year spot.
The 30-year muni yield finished three basis points higher at 3.73%. The two- and 10-year closed flat at 0.42% and 2.29%, respectively.
Treasuries were so choppy early on, munis had a hard time following. “We have been on land by ourselves,” a trader in New Jersey said. “With the swings of plus or minus two basis points, you do see follow-through, but these up-20 and down-20 ticks in Treasuries are so volatile that the muni world is not following much.”
Yields on Treasuries rose after a mixed day. Fears heightened by Italy pushed investors into the safe-haven asset and then reversed course after Berlusconi said he will retire. By Tuesday’s close, the two-year Treasury yield was up one basis point to 0.25%, the 10-year yield closed six basis points higher at 2.08%, and the 30-year yield jumped up eight basis points to 3.14%.
“The pun around here is we are waiting for the other shoe to drop — and it is Italy,” the Los Angeles trader said. “It’s a much more serious threat than Greece was in terms of reality. So our hope is with Italy’s prime minister gone, we are one more step closer towards a resolution. I think that’s maybe the calm before the storm.”
Many of the changes in Italy — especially the good news — could force a big correction on the bond market. “As a muni guy, I hope the [MMD scale] will adjust down to Treasuries, but it could be the opposite and Treasuries could come up.”
The long end of munis made headlines Tuesday as trading activity was focused farther out on the curve for most of the day.
“People are dabbling a little bit on the bid side,” the New Jersey trader said. “We are flat to up a bit.”
Both retail and institutional buyers are jumping into the market, he said. “There is more retail with the right structure,” the trader said. “The institutional guys are selling most of the 20- to 25-year durations and the retail is eating it up.”
“Most of the activity we saw was in the back end of the curve,” a trader in Florida said. “All the trades suggest one to two basis points weaker. It’s a little steeper in the curve driven by the back end.”
In the front end, the market was more selective, the trader said. “There are not a lot of trades within 10 years.” The belly of the curve was quiet.
Muni-to-Treasury ratios remain high. The five-year ratio closed Monday at 136.8%, and the 10-year ratio closed at 114.5%. The 30-year ratio is 121.7%. Ratios have not approached these high levels since early 2009.
In the primary market, Citi priced a second day of retail orders for $600 million of New York City Transitional Finance Authority future tax-secured bonds. The credits are rated Aa1 by Moody’s Investors Service and AAA by Standard & Poor’s and Fitch Ratings.
Yields ranged from 2.84% with a 4% coupon in 2022 to 4% priced at par in 2033. Debt maturing in 2013 was offered via sealed bid. Credits maturing in 2024, 2025, 2028, 2032, and 2038 were not offered for retail. The bonds are callable at par in 2021.
Bank of America Merrill Lynch priced $325.8 million of Massachusetts Water Resources Authority general revenue refunding bonds, rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch.
Yields ranged from 1.91% with a 4% coupon in a 2018 split maturity to 3.85% with a 3.75% coupon in 2031. Credits maturing in 2024, 2025, 2027 to 2029, 2032, and 2042 were not offered for retail. The bonds are callable at par in 2021 with the exception of credits maturing in 2021 and 2022 with are callable at par in 2016.
BMO Capital Markets priced $211.6 million of Chicago tax-exempt general obligation bonds Tuesday. The taxable portion was issued Monday. The bonds are rated Aa3 by Moody’s, A-plus by Standard & Poor’s, and AA-minus by Fitch.
The debt yielded 4.75% with a 4.625% coupon in 2032, 4.92% with a 5.25% coupon in 2035, and 5.07% with a 5% coupon in 2040. The bonds are callable at par in 2021.
B of A Merrill won the bid for $159.1 million of Florida State Board of Education public education capital outlay refunding bonds. The bonds are rated Aa1 by Moody’s and AAA by Standard & Poor’s and Fitch.
Yields range from 3.04% with a 4% coupon in 2023 to 4.10% with a 4% coupon in 2030. Credits maturing in 2022, 2024, 2029, 2031, and 2032 were sold but not available. The bonds are callable at par in 2021.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed losses on longer-dated maturities. A dealer sold to a customer Massachusetts School Building Authority 5s of 2041 at 4.13%, three basis points higher than where they traded Monday.
A dealer bought from a customer New York’s Hudson Yards Infrastructure Corp. 5.75s of 2047 at 4.95%, two basis points higher than where they traded Monday. Bonds from an interdealer trade of Washington 5s of 2041 traded at 4.16%, two basis points higher than where they traded Monday.
Bonds from an interdealer trade of Richmond Metropolitan Authority 5.322s of 2041 traded at 5.2%, one basis point higher than where they traded Monday.
