Dealers just can’t seem to get enough of munis.
Activity was higher than expected for most of Thursday’s trading session. Though most market participants assumed the week between Christmas and New Year’s would be dead, there is a surprising amount of activity, with traders saying not everyone has closed up shop for the year.
The activity pushed the 10-year muni yield down one basis point to 1.86% to set a new all-time low as recorded by Municipal Market Data.
“You have a lot of cash coming in during December for coupon payments and the like,” a trader in New Jersey said. “And there is an anticipated stream in January, so there’s a lot of cash that is available at this point in time and issuance is down. So that has put pressure on muni prices, which means a lowering in yields.”
Ahead of January reinvestment money, dealers are hoarding short-term bonds and waiting to sell them after Jan. 1 when demand spikes. A trader in New York said he is seeing a lot of buyers in the 2016 range.
“Dealers will sometimes play that card,” he said. “They will go in ahead of the money. Load up on it. And then stock it away and not offer it until January, and then mark it up and sell it to customers.”
Munis were firmer Thursday, according to the MMD scale. Yields inside the three-year were steady while the four-year yield fell two basis points. The five-year yield dropped three basis points. Six-year to 15-year yields fell one basis point and yields outside the 26-year closed down two basis points.
On Thursday, the 10-year muni yield fell one basis point to 1.86%, breaking the previous record of 1.87% set Wednesday and the 1.91% record set the week before Christmas.
The two-year yield closed flat at 0.36% for its 16th consecutive trading session. The 30-year yield dropped two basis points to 3.56%.
Treasuries firmed Thursday. The benchmark 10-year yield fell three basis points to 1.90% and the 30-year yield fell one basis point to 2.91%. The two-year yield held steady at 0.28%.
Bank of America Merrill Lynch won the bid for $299.5 million of Municipal Electric Authority of Georgia revenue bonds.
The first series consists of $100.73 million of taxable power revenue bonds, rated A-plus by Standard & Poor’s and Fitch Ratings. Yields ranged from 1.58% in 2013 to 4.98% in 2028, all priced at par.
The second series consists of $57.98 million of taxable general power revenue bonds, rated A-plus by Standard & Poor’s and Fitch. Yields ranged from 1.58% in 2013 to 4.98% in 2028, all priced at par.
The third series consists of $59.53 of taxable project one subordinated bonds, rated A by Standard & Poor’s and A-plus by Fitch. The bonds were priced at par to yield 4.03% in 2020 and 4.43% in 2022.
The fourth series consists of $81.24 million of general resolution projects subordinated bonds, rated A by Standard & Poor’s and A-plus by Fitch. Yields ranged from 3.52% in 2018 to 4.43% in 2022, all priced at par.
When looking at where muni bonds might be headed in the future, Schroders Investment Management said positive factors outweigh the negatives.
In 2011, most states balanced budgets by cutting spending or increasing revenue and are expected to continue balancing budgets into 2012.
In the past, states solved budget gaps by making short term changes, and avoided long term structural changes. States would put workers on furlough instead of permanently firing them, or assume they would get federal aid and draw down on reserves, for example.
This year, states made lasting, meaningful cuts as opposed to short-term, one time gains, according to Eric Friedland, head of municipal research at Schroders.
States reduced head count, negotiated labor concessions, and increased multi-year taxes.
“States have solved budget gaps by taking long-term meaningful cuts,” he said. “And no one expected them to do that.”
Headwinds still exist for muni issuers going into 2012.
The housing market remains weak, which has a lagging negative impact on local governments, and lowers property tax revenues. Pensions and post-retirement employee benefits will continue to be a negative driver for local governments.
Due in part to all these factors combined, Friedland expects the essential service revenue sectors, including public power, water, and sewer utilities, to offer credit stability in a low growth rate environment.
“These sectors benefit from having a monopolistic service, the ability to increase rates autonomously, and being able to pledge a defined revenue stream with protective covenants to bondholders,” he said.
“They have protective covenants and a revenue source that you don’t see with general obligation bonds,” he added. “They isolate the investors from potential bad policy decisions a government may make.”
Friedland recommended being more picky in the health care sector.
“Those positioned best are the state-wide systems that have good market position, a multi site system with vertical integration, physicians that are aligned with hospitals, and hospitals that are set up to handle larger volume.”
“There are winners and losers, but we are picking those that we think are strong and are trading cheap,” Friedland said.
“The sector is painted with a very wide brush. So a lot of investors stay away from all hospitals. We try to come in and pick up the better ones. And find the gems in the sector that are perceived as weak.”
