Longer-term municipal bond prices fell for a 10th consecutive session Tuesday despite another day of light issuance and quiet trading.
“We’ve had a steady grind to higher yields in the face of a low-supply environment, and that has a lot of people on the defensive,” a trader in Florida said. “We’re maybe one week away from a decent calendar that could send yields significantly higher. That’s the way the market trades.”
Bonds maturing between five and 24 years from now saw yields move up two or three basis points Tuesday, according to the Municipal Market Data triple-A general obligation scale. Longer-term bonds weakened by four basis points.
“We saw some trades in high-grades today —¯ Maryland GOs, North Carolina GOs —¯ inside of 10 years that were trading at higher spreads than they had in multiple trading sessions,” the trader said.
MMD’s 10-year yield is now at 3.11%, or 21 basis points up from a four-month low on March 16.
A rival scale from Municipal Market Advisors quoted the 10-year triple-A yield at a much weaker 3.25% on Monday. That scale is derived from polling institutional brokers.
The weakening was initially led by the reversal of an earlier flight to quality, but traders now point to low supply and a reluctance among buyers for the continued weakness. “We know there is cash on the sidelines and buyers out there,” the trader said. “We just don’t think there’s enough demand to meet any potential supply coming forward.”
Last week saw the most munis sold in more than a month, as $4.7 billion entered the market. But new volume in 2011 has averaged roughly $3 billion a week, versus about $8 billion per week in 2010, and this week is slated to see less than $2 billion sold.
The lack of issuance makes price discovery a challenge.
“It’s very quiet so it’s hard to judge what kind of movement is happening,” another trader in Florida said. “We put stuff out for the bid; it’s okay but it’s not great. It’s been very quiet for a few weeks now.”
The threat of new inventory is one factor driving muni prices down, she added, though the supply concerns from one month ago were never borne out. When a surge of supply will hit the market is the million-dollar question, she said.
“There’s just really a lack of buying out there and we’re not seeing a lot from retail,” she said. “There’s not a lot of new names coming out; it’s just more of the same.”
Short-term municipals appear to be a different animal — the two-year muni has remained flat at 0.63% for the past four trading sessions, and has only jumped four basis points since March 16.
A sell-off in Treasuries contributed to the general weakening among munis on Tuesday. Traders were selling government debt and putting cash into equities as they look forward to what is forecast to be a positive nonfarm payrolls employment report on Friday.
Treasuries began the morning quietly but then sold off as $35 billion of five-year notes were issued at a concession in the early afternoon. The two-year yield rose five basis points to 0.83%, while the 10-year yield weakened four basis points to 3.49%, its highest since March 8. The 30-year yield backed up three basis points to 3.54%.
Not everyone believes Treasuries are providing direction to munis, though.
“I don’t think the Treasury market has much impact on the municipal sector,” the first Florida trader said. “We follow it to some degree, but there are bigger elephants in the room. Supply issues are more paramount. If the Treasury market were to turn around and we saw a 10 basis point rally, I think munis would be stuck in the mud. We’d stay still.”
Recent weakness among municipals has also been attributed to buyers unloading assets to raise money for April taxes, and dealers being risk-averse as the first quarter comes to an end.
In the new-issue market, Florida’s Collier County Industrial Development Authority priced $102.3 million of facility revenue bonds on behalf of the NCH Healthcare Group.
Morgan Stanley priced the deal. It was rated A2 by Moody’s Investors Service and A by Fitch Ratings. Yields range from 1.80% in 2012 to 6.40% in 2039.
“The deal did well,” a Florida trader said. “It looked attractively priced and was definitely a new price point for the retail investor.”
In the Midwest, Goldman, Sachs & Co. priced Whiting, Ind.’s $187.8 million of environmental facilities revenue bonds on behalf of a BP Products North America Inc. refinery project.
The bonds were rated A2 by Moody’s and A by Standard & Poor’s. They were offered in two maturities: a 3.14% note maturing in 2016, and a 4.62% note maturing in 2021.
Bank of America Merrill Lynch priced for retail investors $110.3 million of San Jose, Calif., special hotel-tax revenue bonds. The deal was rated A2 by Moody’s and A-minus by Standard & Poor’s.
The offer included yields ranging from 2.45% in 2014 to 6.03% in 2031. Bonds maturing in 2042 were not offered during the retail order period.
Bank of America Merrill also priced $26.1 million of San Jose lease revenue bonds for retail. The higher-rated deal was given Aa2 ratings from Moody’s and a AA-plus from Standard & Poor’s. Yields ranged from 2.72% in 2016 to 5.79% in 2026. Once again, the 2042 maturity was not offered to retail.
The San Antonio Independent School District sold $99 million of unlimited-tax refunding bonds via Loop Capital Markets.
The bonds carried high underlying ratings of Aa2 from Moody’s and AA from Fitch. They were further enhanced by Texas’ triple-A Permanent School Fund, and yielded between 0.83% in 2013 to 4.36% in 2029.
