The tax-exempt market seemed confused Thursday, with some traders noting deals were well received, and others saying there was very little interest.
“It’s very random,” a trader in Chicago said. “I’m looking at inventory and the things I would expect to trade right away I’m staring at, and the things that have uniqueness have blown out the door. If you have inventory priced appropriately, they go.”
The most interesting thing was the diversity of customer types in the market, he said. “There is electronic distribution, institutional customers, dealers, direct and through brokers — so it’s all facets. But again, there is no rhyme or reason to what they are buying or what size,” he said.
“There is a tremendous amount of cash, and the second leg of December redemptions hit today,” the trader said. “And there are yearend discussions going on with financial planners about what needs to be accomplished, so you see a variety of things happening.”
A trader in New York noted the interest in deals is based on supply and demand. “Based on averages, there is more supply of Puerto Rico bonds in the secondary compared to D.C., so it’s going to do better because of the lack of paper,” he said, referring to the $668.7 million Puerto Rico Infrastructure Financing Authority deal priced by Wells Fargo Thursday and the $400 million District of Columbia deal priced by Wells Fargo Tuesday and Wednesday.
By early afternoon, the market started to show signs of slowing as trading activity quieted in the secondary.
“I hate to say it, but it’s starting to feel like the end of the year,” the trader said. “It’s getting sluggish.”
The secondary is still moving, he added, but “it feels like they are trying to get trades done this week because next week is going to be a giant snooze-fest.”
Though interest faded in the afternoon, buying was strong Thursday morning as traders looked to put cash to work.
“So far, we have a couple new issues out,” a second trader in New York said. He noted the $145.6 million North Carolina Garvee deal priced by Bank of America Merrill Lynch was very attractive.
“The Garvee deal is three times oversubscribed,” he said. “So there is still a lot of appetite out there and a lot of demand. There is a lot of cash chasing very few bonds and it’s becoming difficult from a portfolio manager’s perspective to build a portfolio and construct it from ground up, given where levels are. You put in $5 million for a new issue and you get [$500,000].”
While it’s difficult, given low yields, “we have to plug away and we have a lot of cash to put to work,” he said.
At some point, the market may take a step back, but until then, “it seems like we are getting a low interest rate environment for the foreseeable future,” he said. “It will be a slow grind, I think.”
This trader was surprised to see there are still new issues, given the time of the year and that “the prior two weeks have seen so much supply and it’s been absorbed supremely well,” he said. “Issuers are taking advantage of yields.”
Munis were flat to firming, according to the Municipal Market Data scale.
On Thursday, the two-year muni yield closed flat at 0.36% for its seventh consecutive trading session. The 10-year yield finished steady at 1.94%. The 30-year yield fell one basis point to 3.63%.
Treasuries were choppy Thursday, but ended the day weaker.
The benchmark 10-year yield finished up one basis point to 1.91% and the 30-year yield closed up two basis points to 2.92%. The two-year yield finished flat at 0.25%.
In the primary market, Wells Fargo priced for institutions Puerto Rico revenue bonds in three series. The bonds are rated Baa1 by Moody’s Investors Service and BBB by Standard & Poor’s.
The first series was federally taxable and had a 0.25% coupon with a 275 basis point spread of the comparable Treasury maturing in 2013. Yields on the second series, $194.1 million of bonds not subject to the alternative minimum tax, ranged from 2.38% with a 4% coupon in 2014 to 5.00% and 4.82% with 5.25% and 6% coupons in a split 2026 maturity. The debt is callable at par in 2021. Bonds in the third series, $134.6 million of AMT debt, had a 3% coupon priced at par maturing in 2026.
Bank of America Merrill Lynch priced the North Carolina Garvees, rated Aa2 by Moody’s, AA by Standard & Poor’s, and AA-minus by Fitch Ratings.
The bonds yielded 2.10% with 2% and 4% coupons in a split 2013 maturity. The bonds are callable at par in 2017.
In the competitive market, Suffolk County, N.Y., was expected to issue $400 million of tax anticipation notes, but delayed the sale until next Tuesday.
In the secondary market, trades recorded by Municipal Securities Rulemaking Board showed firming across the curve, though more noticeably on the long end.
Bonds from an interdealer trade of New York Liberty Development Corp. 5s of 2041 yielded 4.28%, 11 basis points lower than where they traded Wednesday.
A dealer bought from a customer California’s Golden State Tobacco Securitization Corp. 5.75s of 2047 at 8.22%, three basis points lower than where they traded Wednesday.
