The tax-exempt market made small but steady gains Wednesday, as demand continues to outweigh supply and muni yields follow Treasury yields lower.
The 10-year and 30-year muni yields set record lows for the third time this week.
Traders said they expect rates to stay relatively low through the summer while reinvestment money continues to flow into the market.
“Through August rates will stay low because of supply and demand,” a Los Angeles trader said. “Then there will be a lot of volatility through the fall from the presidential election. And that volatility will be good for bonds and keep Treasury, and accordingly muni, rates low.”
A big jump in yields is generally not expected to happen anytime soon, given that most of the supply is coming from refinancings, he added. “The volume is coming from refinancing,” he said. “People are still afraid to issue new money.”
Other traders agreed the market continued to strengthen on supply and demand factors, as well as influence from Treasuries.
“We are a little firmer today,” a New York trader said. “Treasuries are coming back. We will probably resume buying again shortly.”
Munis continued to climb higher Wednesday, according to the Municipal Market Data scale.
Inside five years, yields were steady while outside six years, yields dropped one and two basis points.
The 10-year and 30-year yields each closed down one basis point to set new record lows. The 10-year closed at 1.61%, breaking the previous record low of 1.62% set Tuesday. The 30-year yield ended the day at 2.79%, breaking the previous record low of 2.80% set Tuesday. The two-year closed at 0.31% for the eighth consecutive trading session.
The tax-exempt market has been steady or firmer for 23 consecutive sessions. Since the most recent rally began on June 22, yields on the 10-year have fallen 25 basis points, while the 30-year yield has plunged 37 basis points.
Treasuries were stronger across the curve. The benchmark 10-year yield and the 30-year yield fell one basis point each to 1.40% and 2.46%, respectively. The two-year yield dropped one basis point to 0.22%.
In the primary market, Barclays Capital priced for retail $900 million of University of California Regents limited project revenue bonds in tax-exempt and taxable series. The bonds are rated Aa2 by Moody’s Investors Service, AA-minus by Standard & Poor’s and AA by Fitch Ratings.
The first series included $800 million of tax-exempt bonds and the second series contained $100 million of taxable paper. Prices were not available by press time.
JPMorgan priced $245 million of Virginia Small Business Financing Authority senior-lien revenue bonds, rated BBB-minus by Standard & Poor’s and Fitch. The deal was expected to price Thursday.
The bonds yielded 4.35% with a 5% coupon in 2034 and 4.45% with a 5% coupon in 2040. The bonds are callable at par in 2022.
In the competitive market, Bank of America Merrill Lynch won the bid for $298.4 million of Florida State Board of Education full faith and credit public education capital outlay refunding bonds, rated Aa1 by Moody’s and AAA by Standard & Poor’s and Fitch.
Yields ranged from 0.40% with a 5% coupon in 2014 to 3.25% with a 3.125% coupon in 2033. The bonds are callable at par in 2022.
In the secondary market, trades compiled by data provider Markit showed firming. Yields on Pennsylvania 5s of 2026 and New York 3.75s of 2031 each dropped three basis points to 2.22% to 2.78%.
Yields on Austin Water and Wastewater 5s of 2025 and Georgia Road and Tollway Authority 5s of 2020 fell two basis points each to 2.29% and 1.32%. Yields on Massachusetts State Water Resources 5s of 2028 and California 4.25s of 2035 fell one basis point each to 2.40% and 3.74%.
Analysts in the muni space this week have focused on the idea that there may be less of a stigma when it come to a municipality defaulting on its debt or filing for protection from creditors under Chapter 9.
In the past, they said, a municipality would try to avoid default at all costs to make sure it could continue to access public markets. That thinking may be shifting, they said.
“Aside from the credit issues driving these filings, an unsettling additional concern is that, unlike past municipal bankruptcies, the Stockton bankruptcy is seeking to spread the losses beyond the more traditional parties usually affected in municipal bankruptcy,” wrote Patrick Early, municipal analyst at Wells Fargo Advisors, referring to the bankruptcy of Stockton, Calif.
“Stockton is targeting the city’s bondholders for large concessions as well, with the Stockton city attorney saying publicly that they think bondholders should share the pain,” he added.
The stigma of bankruptcy that was prevalent in the past has helped lead to better outcomes for muni bondholders, but Stockton’s plan for bankruptcy is a shift from earlier thinking that paying bondholders should be a priority.
“Clearly, Stockton has decided that the long-term stigma attached to bankruptcy can be trumped by the near-term benefits of proposed debt write-downs and suspended debt service payments,” Early wrote.
“The bankruptcy and workout plan floated by Stockton has caused many market participants to wonder whether the stigma, the apprehension of losing market access, is no longer effective as a guiding principle for issuers,” he said.
Early said that he expects creditors, including bondholders, to resist taking losses in order to avoid setting any precedents.
