Market Post: Munis Steady to Weaker As Demand Fades

The tax-exempt market was holding its steady tone Thursday afternoon as traders noted disenchantment with absolute low yields contributed to leaving balances on new issues. The secondary market felt steady to weaker throughout the day.

“It seems as if there is a lot of competition in the secondary even though it feels like it’s weakening up a bit,” a San Francisco trader said. “But it doesn’t feel that much weaker to me. It feels a little flat.”

He added that there are more items coming out in the secondary and “bids still seem strong.”

“I’m putting traffic largely in the secondary because I’m not finding structures that I like in the new issue stuff,” he said.

In the primary market, the trader said he is seeing a few balances on deals. “And that’s a little surprising. There seems to be a lot of money chasing not that much stuff but it’s still not stronger. I think we may have got a little overbought.”

One analyst said the market has been quiet with softer demand, driven in part by vacations, but also from a general distaste of absolute low yields. “In yield, spreads have come in and offerings haven't followed lockstep,” according to Dan Toboja at Ziegler Capital Markets. “There are some hints of increasing primary supply in the coming weeks and buyers are hoping it will be enough to cheapen the market for reentry.”

To be sure, he said as long as muni bond funds continue to record inflows, supply stays light, muni-to-Treasury ratios remain attractive, and Treasuries remain firm, any sell off will be short-lived.

In the primary market, the remaining largest deals of the week were priced. Morgan Stanley priced $250 million of Iowa Finance Authority Midwestern disaster area revenue bonds, rated Baa3 by Moody’s Investors Service and BBB-minus by Standard & Poor’s and Fitch Ratings.

The bonds yielded 4.75% priced at par in 2042 and are callable at par in 2022.

Bank of America Merrill Lynch priced for institutions $225 million of Metropolitan St. Louis Sewer District revenue bonds, rated Aa1 by Moody’s, AAA by Standard & Poor’s, and AA-plus by Fitch.

Yields ranged from 0.55% with a 4% coupon in 2016 to 3.13% with a 5% coupon in 2042. The bonds are callable at par in 2022.

Raymond James|Morgan Keegan priced $203.9 million of Mississippi unlimited tax general obligation refunding bonds, rated Aa2 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch. Pricing details were not available by press time.

Morgan Stanley priced $192.6 million of Indiana Finance Authority first lien wastewater utility revenue bonds for the CWA Authority Project, rated A1 by Moody’s and AA by Standard & Poor’s.

Yields ranged from 0.49% with a 4% coupon in 2014 to 4% priced at par in 2042. The bonds are callable at par in 2022.

On Wednesday, the 10-year Municipal Market Data yield finished steady at 1.75%. The two-year finished steady at 0.29% for the 10th consecutive session. The 30-year yield rose two basis points to 2.93%.

Treasuries were weaker Thursday afternoon. The benchmark 10-year yield jumped five basis points to 1.70% while the 30-year yield increased two basis points to 2.77%. The two-year was steady at 0.29%.

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