The tax-exempt market took another big hit Wednesday as yields rose for the third consecutive trading session, following Treasury yields higher.
A combination of demand for riskier assets as well as an uptick in municipal supply fueled cuts in bond prices.
“I’m hearing deals need a good amount of concessions to entice buyers,” a New York trader said. “But even in the secondary munis are weaker, especially on 10s and 30s. It’s partially due to weaker Treasuries and we definitely need concessions for munis to find a home.”
He added that the weaker market is partly driven by heightened supply this week, but there was a fair amount of June reinvestment money that should have offset an increase in supply, so the market is mostly driven by weaker Treasuries. “I just think on an absolute basis munis yields are tight, so when new deals price, it’s mostly traditional buyers that are forcing some concessions,” the trader said.
Other traders said munis were weaker because demand could not match supply.
Munis ended weaker Wednesday, according to the Municipal Market Data scale.
The three- to five-year yields rose one and two basis points while the six-year yield jumped four basis points. Outside seven years, yields spiked up seven basis points across the curve.
The 10-year yield and the 30-year yield jumped seven basis points each to 1.85% and 3.16%.
The two-year was steady at 0.32% for the fourth consecutive trading session.
After rising 10 basis points so far this week, the 10-year yield now remains 18 basis points above its record low of 1.67% set Jan 18. After the 30-year yield jumped 12 basis points so far this week, the yield remains 12 basis points off its record low of 3.04% set on Friday.
Treasuries were much weaker for the third session as investors traded in safe-haven bonds for riskier assets. The benchmark 10-year yield jumped 10 basis points to 1.67% and the 30-year yield spiked up 11 basis points to 2.74%. The two-year yield rose two basis points to 0.27%.
So far this week, the 10-year Treasury yield jumped 21 basis points from when it closed at 1.46% on Friday and the 30-year yield shot up 22 basis points from Friday’s close of 2.52%.
In the negotiated market, Goldman, Sachs & Co. priced for institutions $800 million of New York City Transitional Finance Authority future tax-secured and tax-exempt subordinate bonds in two series, following a two-day retail order period.
The bonds are rated Aa1 by Moody’s Investors Service and AAA by Standard & Poor’s and Fitch Ratings.
Yields ranged from 0.56% with 2%, 4% and 5% coupons in a split 2015 maturity to 3.56% with a 5% coupon in 2039. Credits maturing in 2014 were offered via sealed bid. The bonds are callable at par in 2022 except for credits maturing between 2025 and 2028 which are callable at par in 2018.
Yields were increased up to nine basis points from the second day of retail pricing Tuesday and increased as much as 15 basis points on the long end from the first day of retail pricing Monday.
Bank of America Merrill Lynch priced $259.3 million of New Jersey Higher Education Student Assistance Authority student loan revenue bonds, subject to the alternative minimum tax, in two series.
Yields on the first series, $248.3 million of senior student loan revenue bonds rated Aa2 by Moody’s and AA by S&P, ranged from 1.10% with a 3% coupon in 2013 to 4.70% with a 4.625% coupon in 2030. The bonds are callable at par in 2022.
Bonds in the second series, $11 million of subordinate student loan revenue bonds rated A2 by Moody’s and A by Standard & Poor’s, were priced at par to yield 5.75% in 2039. The credits are callable at par in 2022.
In the competitive market, Citi won the bid for $226.3 million of Seattle revenue bonds, rated Aa1 by Moody’s and AA-plus by Standard & Poor’s. The bonds had maturities ranging from 2012 to 2042. Prices were not available by press time.
The New York City Transitional Finance Authority auctioned $200 million of future tax-secured taxable subordinate bonds in two pricings — each $100 million — and rated Aa1 by Moody’s and AAA by S&P and Fitch.
JPMorgan won the bid for the first $100 million. The bonds had coupons ranging from 1.35% in 2017 to 2.35% in 2021. Prices were not formally re-offered.
Citi won the bid for the second $100 million. Details on pricing were not available by press time.
In the secondary market, trades compiled by data provider Markit showed weakening in Wednesday’s session.
Yields on Massachusetts Development Finance Agency 5s of 2041 and California Department of Water Resources 5s of 2019 each jumped four basis points to 3.76% and 1.47%, respectively.
Yields on Dormitory Authority of the State of New York 5s of 2041 and Miami-Dade County 0s of 2033 each rose two basis points to 3.08% and 5.78%.
Since municipals starting weakening on Monday, muni-to-Treasury ratios have fallen as munis outperformed Treasuries and became relative more expensive.
The two-year muni yield to Treasury yield ratio dropped to 118.5% on Wednesday from 123.1% at the close of Friday’s session. The 10-year ratio fell to 110.8% on Wednesday from 119.9% on Friday. The 30-year ratio fell to 115.3% from 120.2%.
When compared to the beginning of the year, the 10-year muni looks relatively cheap compared to its Treasury counterpart. The 10-year ratio closed at 110.8%, well above the 96.4% ratio on Jan. 3.
The 30-year muni looks more expensive now than it did at the beginning of the year, with a 115.3% ratio now compared to the 119.4% ratio on Jan. 3.
