Municipal bond yields continued rising one to two basis points Tuesday as the market struggled to digest a relatively decent slate of new issues.
The secondary market was considered quiet and traders described the buy-and-sell environment using terms like gridlock and stalemate.
“Nobody is in a desperate need to raise cash,” a trader in California said, noting that muni mutual fund redemptions fell to $404 million last week, their lowest in 2011. “So that’s definitely calmed down.”
Tax-exempt yields rose one to two basis points for bonds maturing between seven and 20 years out, while all others were flat, according to the Municipal Market Data triple-A scale.
The 10-year yield rose two basis points to 3.23%, continuing a steady rise after a brief reprieve Monday. Its yield has kicked up 33 basis points from March 16, but the sell-off has been slow enough to avoid sounding the alarms.
“That, over time, really does take its toll,” the California trader said, noting the same thing happened in November and December but at a more rapid pace. “This is a little bit of drip-torture, but it’s not too bad.”
Despite the consistent weakening, selling pressure was only moderate Tuesday.
“I think people are comfortable with their positions and I don’t sense the same need to raise capital that we saw earlier in the year, but they are cautious going forward,” he said.
Another trader in Chicago added: “I’m at a loss here as to why we’re not doing more business aside from it being tax season. Things are getting done in little bits, but people are reluctant to cut too much.”
MMD’s two-year scale yields 0.68% and the 30-year offers a comparatively cheap 4.80%.
Most traders continue to expect yields to rise, especially if a surge of supply finally hits the market after the slimmest quarter for volume in a decade.
Last week’s MMD survey of traders indicated that 75% of respondents were bearish on the market; the rest were neutral. The survey has now seen zero bullish responses for two consecutive weeks.
“It’s tough to swim against the tide,” the trader in California said. “You try to do whatever you can to generate interest. We’re certainly not as aggressive as we were a month ago.”
A trader in New York said muni yields will keep rising unless a Treasury rally provides some resistance. “Within the next month or two there will be supply coming down the road, which will probably lead to cheaper rates,” he said.
The New York trader said muni players are on the sidelines with tax season coming up, so he wasn’t expecting much price discovery this week despite a decent amount of paper in the Tuesday market.
“A lot of offerings are still regurgitating from the prior week’s new-issue calendar,” he said. “Some of the dealers are still struggling to move those balances, so it’s a little headstrong here between buyers and sellers at the moment.”
The Treasury market began Tuesday with a positive tone but then switched course. The 10-year Treasury note finished at 3.49%, six basis points weaker than Monday’s finish, while the two-year yield rose five basis points to 0.83% and the 30-year yield rose three points to 4.51%.
In the new-issue market Tuesday, two dozen banks led by Wells Fargo Securities continued to sell $500 million of future tax-secured subordinate bonds for the New York City Transitional Finance Authority. Monday’s retail period sold $208 million, which New York City deputy budget director Alan Anders called “strong, both in terms of percent of the deal and dollar amount.”
The deal was offered in two series, each maturing between 2012 and 2025, with tax-exempt yields ranging from 0.65% to 4.15%. Yields were unchanged from Monday.
“It’s priced very attractively,” said a trader in New Jersey. He said the second day of retail order periods tend to be slower but there did appear to be some follow-through and he wouldn’t be surprised if another $100 million was sold before institutional pricing begins Wednesday.
The bonds were rated AAA by Standard & Poor’s and Fitch Ratings, and Aa1 by Moody’s Investors Service.
The deal is one of the largest offers in an otherwise light week.
New supply is anticipated to total $3.3 billion this week, or just less than the $3.7 billion weekly average of 2011. The week before saw $2.4 billion get sold, while the weekly average of last year was $8 billion.
Elsewhere in the negotiated market, Goldman, Sachs & Co. priced $397.5 million of taxable certificates of participation for Denver Public Schools.
The bonds, rated Aa3 by Moody’s and A-plus by Standard & Poor’s, were offered in 2026 maturities with a 275 basis point spread over Treasuries, and in 2037 maturities with a 250 basis point spread over Treasuries.
Philadelphia also marketed to retail $272.2 million of general obligation bonds via JPMorgan. The bonds were rated A2 by Moody’s, BBB by Standard & Poor’s, and A-minus by Fitch.
Aside from a sealed bid for 2011 maturities, yields were offered from 1.63% in 2012 to 5.98% in 2031.
Assured Guaranty Municipal offered credit enhancement on the Philadelphia bonds maturing in 2016, 2020, 2023, and 2026. These bonds were rated Aa3 and AA-plus by Moody’s and Standard & Poor’s.
“It seems to be doing well particularly for the latter maturities,” the New Jersey trader said, noting appetite for bonds maturing between 2020 and 2026. “The 23s and 26s are AGM-insured, so that helps quite a bit because of the credit sensitivity in the retail market.”
When the market is going well, he added, people won’t pay for insurance, but in the current environment the wrap is just enough to give people credit comfort.
Raymond James also priced for retail $65.1 million of utility system refunding revenue bonds for Charlotte County, Fla. The bonds were all insured by AGM and carry underlying ratings of Aa3 from Moody’s and AA-minus from Standard & Poor’s. Interest payments range from 0.95% in 2012 to 4.97% in 2024.
