Munis Firm Again as New Supply Entices Buyers

The municipal bond market continued to firm for a second session Wednesday as new supply found a market full of ready buyers. The two-day trend marks a reversal from a four-week trend of rising yields.

The firming environment allowed a series of issuers to raise prices, some significantly so: long bonds on the biggest deal of the day had their yields lowered up to 18 basis points.

“There was some decent demand owing to volatility in the Treasury market and, especially, the potential budget cuts coming out of Washington,” a trader in Pittsburgh said.

The biggest appetite was for nine- and 10-year bonds, where yields were chopped two basis points, according to the Municipal Market Data triple-A scale.

All MMD yields beyond 2014 were cut one basis point, but short-term notes were steady. The benchmark 10-year note finished at 3.22%.

A New York trader said the day’s focus was on the primary market, while the secondary was pretty quiet by comparison.

“Buoyant trades seemed very selective at first but started to involve a broader array of trading from five years and longer,” Randy Smolik wrote in his daily commentary for MMD.

Citi offered a combined retail and institutional sale for $657 million of North Texas Tollway Authority bonds, the biggest issue anticipated this week after Liberty Development Corp. postponed what was supposed to be a $900 million deal.

The NTTA bonds are backed by special project revenue and rated AA by Standard & Poor’s and AA-minus by Fitch Ratings.

“You have a lot of the bond funds buying into this — the yield mavens just looking to add some yield to their portfolios,” said a trader in Chicago, who considered the deal cheap even after the repricing.

Yields were slashed on all points of the curve between the morning pricing and an early afternoon pricing. Two-year yields fell 10 basis points to 1.55%, while 30-year bond yields were slashed 18 basis points to 5.52%

Buyers have been shying away from single-A and lower-rated bonds, so it was a huge plus for the authority to nab double-A ratings thanks to a toll-equity loan agreement with the Texas Department of Transportation.

Just over $57 million of the deal was offered in capital appreciation bonds maturing in 2037 and 2043. They offered yields to maturity of 7.55% and 7.60% in the afternoon pricing, down from 7.75% and 7.875% in the preliminary pricing a few hours before.

“That enticed a lot of guys to come in — just to play a larger deal,” the Chicago trader said.

Another series of convertible capital appreciation bonds was also repriced higher.

Morgan Stanley offered for retail $240.9 million of subordinate revenue bonds for the Pennsylvania Turnpike Commission.

The deal is rated A3 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch. Yields range from 4.77% in 2022 to 5.69% in 2031.

Some bonds were enhanced by Assured Guaranty Municipal Corp. The wrapped bonds were offered in 2025 and 2031, offering yields of 5% and 5.50%, respectively.

The firm environment allowed Jefferies & Co. to reprice its $295.1 million offering for New York’s Metropolitan Transportation Authority. Yields on the short end were cut two basis points after a one-day retail period Tuesday, while long-term yields were cut up to three basis points.

The dedicated tax fund bonds are rated AA by Standard & Poor’s and AA-minus by Fitch. Yields ranged from 3.63% in 2019 to 4.81% in 2028.

New York paper has performed particularly well since the LDC postponed its offering. Goldman, Sachs & Co. declined to comment on the reason for the delay, which was originally scheduled for December but got postponed due to a spike in yields.

“The pulling of $1 billion of New York supply would certainly help New York prices,” said the Pittsburgh trader.

While the muni market was firming, Treasuries were on a wild swing.

The market opened several basis points weaker but cash ran away from equities and into fixed income after JPMorgan reported weaker results than anticipated, convincing investors that the first-quarter earnings session might not be as positive as hoped.

“It’s the opposite story from this morning,” the Pittsburgh trader said. “Munis were unchanged in the face of a weaker Treasury market. Now the story is limited upside movement in the face of a stronger Treasury rally.”

The 10-year Treasury yield finished at 3.47%, six basis points firmer than in the morning and three basis points lower than Tuesday’s close. That’s also the lowest yield since March 24.

Similar moves pushed the two-year yield down two basis points to 0.73%, while the 30-year Treasury yield fell three basis points 4.55%.

Munis had enough direction from the primary market to ignore the intraday volatility in Treasuries.

“That’s definitely not hurting munis,” said a trader in Chicago, “but I wouldn’t say we’re being dragged up too far.”

The Pittsburgh trader added: “Nine of out 10 times munis lag both ways. It’s a typical story. You got it proved both ways today.”

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