The tax-exempt market ended weaker Tuesday, though traders said activity was much busier than Monday’s quiet session.
All eyes turned to the $10 billion California revenue anticipation note offering that had its first retail order period.
Overall, traders said the market was weaker on the long end as participants cut prices to get bonds out the door.
One trader noted that the short end is stronger as buyers look to invest there in anticipation that rates could be higher in a few years.
“In the short stuff, I think we just continue to go up in prices and down in yield,” a San Francisco trader said. “I don’t know if it is people thinking that rates are going to go up so they want to be invested real short to have the money mature and be able to reinvest at higher rates. That’s the only thing I can think of is rates look like they could go higher. But every time the 10-year Treasury gets at this range, yields come back down.”
On the long end, traders said munis were still weaker.
“People are cutting, but bonds are trading,” a New York trader said. “So we are weaker, but busy.”
In the primary market Tuesday, JPMorgan and Wells Fargo Securities priced $10 billion of California Rans, rated MIG-1 by Moody’s Investors Service, SP-1-plus by Standard & Poor’s and F-1 by Fitch Ratings. A second retail order period is expected Wednesday, followed by institutional pricing on Thursday.
Bonds in the first series of $2.5 billion due May 30, 2013, yielded 0.30% to 0.40% with a 2.5% coupon, but most of that series was not offered for retail.
Bonds in the second series of $7.5 billion yielded 0.40% to 0.55% with a 2.5% coupon due June 20, 2013.
A spokesman for the California treasurer’s office compared that to the state’s September 2011 Ran sale, which yielded 0.38% for notes maturing in May 2012 and 0.40% for notes maturing in June 2012.
The San Francisco trader said the deal will likely do well. “I put in for some and haven’t heard anything, but I am certain that it will do well and I think yields will probably be at the lower end of the range, just because there’s just nothing around,” he said.
Yields were quoted to investors between 40 basis points and 55 basis points, he said, and the deal could easily come in around the 40 to 42 basis point range.
Going into the deal, traders had mixed reactions. “I think the California Ran deal will chew up some work hours,” one trader tweeted. “After that, we should do better. Things will bog down a bit until all orders are in.”
Another trader said the California deal was the only exciting deal. “It’s a sleepy day so far,” the trader tweeted. “California Rans is about the only interesting thing going on. Retail interest is said to not be overwhelming.”
Outside that deal, Goldman, Sachs & Co. priced and repriced $468.9 million of Chicago Board of Education unlimited-tax GOs, rated A1 by Moody’s and A-plus by Standard & Poor’s and Fitch.
The bonds yielded 3.98% with a 5% coupon in 2042. The bonds are callable at par in 2022. Yields were lowered two basis points from preliminary pricing.
In the competitive market, Citi won the bid for $290.32 million of San Francisco GOs, rated Aa2 by Moody’s, AA by Standard & Poor’s and AA-minus by Fitch. The bonds were priced in two series of $251.9 million and $38.3 million. Pricing information was not available by press time.
The New Jersey Environmental Infrastructure Trust auctioned $208.76 million of triple-A rated revenue bonds in two transactions, $198.42 million and $10.34 million.
Bank of America Merrill Lynch won the bid for $198.42 million. Yields ranged from 0.20% with a 3% coupon in 2013 to 2.39% with a 4% coupon in 2026.
Janney Montgomery Scott won the bid for $10.34 million of taxable bonds. Prices were not yet available.
On Tuesday, the 10-year Municipal Market Data yield rose four basis points to 1.80%, while the 30-year yield increased three basis points to 2.95%. The two-year finished steady at 0.29% for the 14th consecutive session.
Treasuries were much weaker Tuesday. The benchmark 10-year yield jumped seven basis points to 1.73%, while the 30-year yield spiked up nine basis points to 2.83%. The two-year yield rose two basis point to 0.29%.
In the secondary market, trades compiled by data provider Markit showed mostly weakening. Yields on Miami special obligation 6s of 2028 and Phoenix Civic Improvement Corp. 5.5s of 2023 jumped four basis points each to 3.53% and 2.20%, respectively.
Yields on Kansas Development Finance Authority 4s of 2025 increased three basis points to 2.42% while Puerto Rico 5s of 2041 rose two basis points to 5.03%. Yields on New York City Transitional Finance Authority 4s of 2042 and New York’s Metropolitan Transportation Authority 4s of 2038 each rose one basis point to 3.85% and 3.94%, respectively.
When looking at investing strategies, analysts at Citi believe the belly of the curve — 12 to 17 years — has the most room for underperformance relative to Treasuries. “With current and near-current refundings continuing to dominate the new-issue calendar, this maturity range continues to see the heaviest new supply,” wrote George Friedlander. “In addition, this maturity range tends to be an ‘orphan,’ with only commercial banks particularly active and consistent buyers.”
