The muni market rally powered into a seventh day Wednesday as investors stocked up on tax-exempt paper before the long weekend.
“Everybody has a sunny tone,” said a trader in New York. “Instead of being up one or two points each day, we’re up two or three overall.”
Intermediate yields fell as much as five basis points, according to Municipal Market Data’s triple-A scale. Other maturities were flat to four basis points lower.
The 10-year yield, at 3.02%, ended the day down five basis points. Since Friday, it has plummeted 13 basis points.
The two-year yield was flat at 0.60%, but down three basis points from Friday. The 30-year yield firmed two basis points to 4.72%. It has fallen six basis points from Friday.
The iShares S&P National AMT-Free Municipal Bond Fund, which with $1.97 billion is the biggest municipal exchange-traded fund, rose 1.27% in the last five trading sessions to $100.80. The ETF provides a theoretical real-time proxy for the S&P National AMT-Free Municipal Bond Index.
The fund remains down 5.08% from six months ago.
“People don’t have anything on the shelf,” a Chicago trader said of inventories. “The Street is pretty light.”
The New York trader added that he doesn’t see much crossover demand but retail and institutional investors “are certainly buying.”
The market focus continues to be on high-grade names, multiple traders said.
“Everything else is just swimming along in their wake,” the New York trader said.
“Lower-grade issuers are able to tap the market,” he added, “but if it comes back six weeks later, appetite is pretty thin for those.”
“Dealers say there was plenty of cash on the sidelines,” Randy Smolik wrote in his daily commentary for MMD. “The lack of primary issuance has let this cash build-up as investments run off.”
This was a major boost to the largest scheduled deal this week. Bank of America Merrill Lynch priced $285 million of health care facilities revenue bonds for the Mayo Clinic in Rochester, Minn. Investors found the deal so attractive, yields fell 15 basis points at re-pricing.
The bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s.
Bonds from the $195 million Series A offer a split maturity in 2038: one is for 3.49% with a 4% coupon, while the other yields 4.22% on a 4.50% coupon.
Both yields dropped precipitously from the deal’s initial pricing when they offered 3.64% and 4.37%, respectively.
The deal also contains a $90 million Series B, which yields 3.48% with a 4% coupon in 2038.
“In this market, something like that is going to come and go quickly,” the Chicago trader said.
“There hasn’t been much availability in Minnesota for anything beyond GO paper, fairly small issuance, thus far this year in any sizable transaction,” a Minnesota trader said. “The structure of this issue, with mandatory tenders, offered incremental yield to investors, and the combination of being a highly recognizable name with limited supply and added yield was attractive.”
Outside of munis, positive earnings from technology companies drove money out of fixed-income assets.
The two-year Treasury yield finished at 0.68%, two basis points higher than Tuesday’s close. The 10-year yield rose five basis points to 3.41% and the 30-year yield kicked up three basis points to 4.46%.
There was bigger action in equities. The Dow Jones industrial average finished up 187 points to its highest level since mid-2008 ¯to 12,453.5 ¯on news of earnings that beat analyst estimates for companies, including Intel Corp., Yahoo and IBM.
But muni traders said demand is holding up for tax-exempt bonds because of the scarcity of supply, as this week’s issuance totals a paltry $1.43 billion.
“Yields are moving down rather suddenly — it’s pretty big now,” said the trader in Chicago. “There’s a real rally. People are running to quality.”
“It’s definitely better,” added a trader in San Francisco. “There’s more retail buying on the front end of the curve.”
The post-Build America Bond market hangover continues to be the dominant theme of the market.
Year-to-date supply totals just $56.9 billion, or 47% of the $120.8 billion floated in the same period last year, according to Thomson Reuters.
Market participants continue to expect a new batch of issuance to be just around the corner, but it still hasn’t arrived. Predictions for the year, once commonly above $400 billion, are finally catching up. The most recent predictions range from Municipal Market Advisors’ $200 billion to Janney Capital Markets’ $300 billion.
“With July starting the new fiscal year for most states and many other issuers, we expect total issuance to trend higher,” Alan Schankel, managing director at Janney, wrote in a Wednesday research note.
He pointed out that finance officials from the market’s biggest issuer, California, aren’t planning to issue bonds through the June 30 end of its fiscal year.
By contrast, Illinois borrowed $3.7 billion of taxable notes in February and hopes to borrow as much as $8.75 billion later this year.
“California and Illinois offer an interesting contrast of issuance plans,” Schankel said. “Of the 10 largest long-term municipal issues in history, six have been from California issuers while three have been from Illinois, including the largest, a $10 billion taxable pension fund issue in 2003.”
Chris Ihlefeld, a portfolio manager at Thornburg Investment Management, said multiple factors have been driving the rally in the municipal market beyond just light issuance.
State and local governments have seen rising revenues from income taxes, he said, and the default rates for both groups have been falling.
“Those are positive indicators, and would support an increase in price levels,” Ihlefeld said.
The Bond Buyer 20-bond index of 20-year GO yields declined eight basis points this week to 4.98%, a four-week low.
The 11-bond index of higher-grade 20-year GO yields dropped seven basis points this week to 4.72%, also a four-week low.
The revenue bond index, which measures 30-year revenue bond yields, fell three basis points this week to 5.57%, another four week low.
The Bond Buyer one-year note index, which is based on one-year tax-exempt note yields, rose three basis points this week to 0.47%, a three-week high.
The weekly average yield to maturity on The Bond Buyer’s 40-bond municipal bond index, which is based on 40 long-term muni bond prices, declined five basis points this week to 5.65%, which is the lowest weekly average for the yield to maturity since the week ended March 24, when it was 5.64%.
In economic news, existing home sales rose 3.7% in March from April. That breaks down to single-family home sales being up 4% from February and condos up 1.6%, according to the National Association of Realtors.
“There are some signs of life in the housing market, with a lot of it coming from the recycling of distressed homes,” Joel Naroff, economist at Naroff Economic Advisors, wrote in a research note.
Naroff said the level of sales is still depressed and was off sharply from the March 2010 sales pace.
“With distressed homes a growing proportion of sales, it was not surprising that prices were down pretty sharply over the year,” he said. “The supply of homes for sale rose for the second consecutive month. I consider that to be a sign that sellers have growing confidence in the market.”
The data contrasts with the 16.9% decline in new-home sales, as reported by the Census Bureau on Wednesday.
Both reports share common themes though: existing home prices were down 5.3% compared to last year while new home prices had deflated 8.9%.
“The new and existing housing markets are in a very precarious situation,” Chris Christopher, a senior principal economist at IHS Global Insight, wrote in a research note. “Prices and sales are falling; inventory is increasing. And the rising commodity prices are hitting the residential construction industry especially hard, as if they didn’t have enough problems already.”
