Munis Unfazed By New Quake

Municipal bond yields were mostly steady Thursday despite volatile equity and Treasury markets, which were on high alert following reports of another possible tsunami in Japan.

“They gave up a little bit, one or two basis points, for bonds 15 years and out,” said a trader in New York. “There was no change through 15 years.”

The Municipal Market Data triple-A scale was steady throughout, following a slow but consistent rise in yields in the days and weeks before. The 10-year tax-exempt yield jumped 35 basis points from a recent low on March 16 to 3.25%, its highest level in nearly two months.

A rival scale from Municipal Market Advisors placed the 10-year muni at 3.31%. It has jumped only 11 basis points from March 16.

MMD’s two-year yield has remained at 0.68% for the past five trading sessions. Its 30-year yield remained at 4.82% Thursday, marking a two basis-point climb from last Friday.

“They only thing that got them alerted was the earthquake in Japan,” the New York trader said. “That seemed to have an effect on all other markets, but not munis.”

A trader in California pointed out that trading has been particularly quiet recently as taxes come due this month.

“Traditionally, April is one of the slowest months in the muni marketplace,” he said. “There are still a fair amount of bid-wanteds out there, but there is a real lack of activity. I mean, the trading room is quiet. People are making their calls and not getting much of a response.”

He confirmed the tsunami warnings were a “non-event” for the muni market.

But for other markets, the warnings were key. Cash flowed into shorter-term Treasuries just before noon as newswires reported tsunami warnings in Japan after another earthquake struck the northeast. The original headlines initiated a flight-to-quality, followed by some recovery when the tsunami warning was withdrawn and the earthquake’s magnitude was revised lower.

A trader in New York said the news was just an intraday event, so munis didn’t react.

“Since the market pulled down and snapped back, you won’t see any reaction to munis, even tomorrow,” he said.

The two-year Treasury yield fell as low as 0.78% before finishing the day at 0.80%, or five basis points firmer than the previous close.

The 10-year note yielded 3.52% just before the warnings but closed the day at 3.56%. The 30-year bond yield rose four basis points to 4.63%.

The Dow Jones industrial average was marginally positive when the warnings appeared. It promptly fell about 100 points but finished just 17 points lower at 12,409.

THURSDAY’S SUPPLY

New-issue supply was light with no sizeable deals hitting the market.

Among negotiated sales, RBC Capital Markets priced $92 million of variable- rate revenue bonds for the Pennsylvania Turnpike Commission.

RBC also offered $42.4 million of unlimited-tax refunding bonds for the Richardson Independent School District in Dallas County.

The Richardson bonds were enhanced to triple-A by the Texas Permanent School Fund. Yields ranged from 0.81% in 2013 to 4.45% in 2028.

“Holders of secondary general market blocks have little to worry about from the primary sector to this point,” Randy Smolik wrote in his daily commentary for MMD. “Next week is shaping up to be another modest issuance week for tax-­exempts.

Big issues next week include a $900 million offering from New York’s Liberty Development Corp. and a $784 million of North Texas Tollway bonds. The Louisiana Public Facilities Authority also announced Thursday that it’s planning to sell $509 million of taxable student loan-backed bonds.

THE WEEK’S ISSUANCE

Numerous traders said market liquidity was limited to high-grade bonds this week, while others struggled.

“If it’s not a triple-A bond, it’s really struggling,” a trader in New York said Wednesday.

“It’s issue-specific,” another added on Thursday. “In higher-grade stuff you’re getting good bids. But for the higher-yielding stuff, the bid side is waning. If people are going to put money to work, they put money on stuff they know they can sell. They want well-known liquid names.”

The trend was evident in new-issues earlier in the week. The triple-A rated New York City Transitional Finance Authority was able to cut a few basis points from its institutional offering Wednesday even as it pushed up its refunding deal to $650.2 million from an original $500 ­million.

But single-A rated revenue bonds for Washington, D.C.’s Howard University were repriced with higher yields for institutions after a one-day retail period. Bonds maturing in 2021 were repriced as much as 22 basis points to 5.23%, representing a 198 basis point spread over that day’s MMD triple-A curve.

Philadelphia, rated in the triple-B to single-A range, also enticed investors with more yield as it downsized its general obligation offering to $253.7 million from the original $272.2 million.

Bonds maturing in 2017 yielded 3.97% Wednesday, up 15 basis points from the retail offering a day earlier. Other maturities climbed between two and 10 basis points, including those insured by Assured Guaranty Municipal.

While some traders said AGM-wrapped bonds provide comfort to retail investors, others said a potential downgrade from Standard & Poor’s is having a clear impact on their liquidity. Standard & Poor’s has said its proposed ratings criteria, if implemented, could result in Assured falling to single-A status from its current AA-plus rating. Fitch Ratings also indicated last month that it wouldn’t rate financial guarantors higher than the single-A range.

“How can you rely on Assured Guaranty when you know the rating could be dropped?” a trader in New York said Wednesday, adding that another downgrade could have market-wide implications.

Richard Lehmann, editor of Distressed Debt Securities, recently commented in his Forbes blog: “If implemented, the S&P downgrade of Assured Guaranty would lead to the demise of the municipal bond insurance business as we know it.”

The trader in California said all wrapped bonds, regardless of who the insurer is, are trading solely on the underlying rating.

Indeed, the average yield on an insured 10-year bond is 70 basis points higher than the double-A scale, according to MMD.

Before Assured lost its last triple-A rating in late October, the same spread was less than 50 basis points.

WEEKLY INDEXES

The Bond Buyer’s 20-bond GO index of 20-year general obligation yields rose four basis points this week to 5.04% — its highest since Feb. 17.

The 11-bond GO index of higher-grade 20-year GO yields gained five basis points to 4.78%, another seven-week high.

The revenue bond index, which measures 30-year revenue bond yields, increased five basis point to 5.61% — its highest since Feb. 10.

The Bond Buyer’s one-year note index declined three basis points this week, to 0.47%, a two-week low.

The yield on the Treasury’s 10-year note rose 10 basis points in the week to 3.56%, its highest level in five weeks.

The 30-year Treasury yield gained 11 basis points to 4.63%, another five-week high.

The weekly average yield to maturity on The Bond Buyer’s 40-bond municipal bond index was unchanged this week at 5.69%.

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