The tax-exempt market ended stronger on Monday as institutional traders noted there was some early buying while retail traders said the market was mostly quiet.
The market is expected to remain fairly quiet for the week as the Labor Day holiday and heavy summer vacations take a toll on the market. The majority of economic news will not be released until later in the week, further dampening trading. With light primary supply, munis will most likely following the direction of Treasuries.
In the retail market, traders said the Labor Day holiday period was in full effect. “It’s like a library in here,” a New Jersey trader said. “It’s quiet – trading wise. And also quiet in the literal sense. Not a single person is on the phone in here.”
Still, he added a small issue of Texas multi-family housing bonds were downgraded to BB from A-minus, which was helping keep the market active. “We are doing a little damage control today,” he said referring to the downgrade.
The market was a little more active on the institutional side. “There are some buyers out there,” a New York trader said. “But slim.”
While it’s an extremely quiet week in the primary market, Bank of America Merrill Lynch priced the largest deal of the week, $191.7 million of Columbus, Ohio, taxable and tax-exempt general obligation, various-purpose and limited refunding bonds in four series. The bonds are rated triple-A by the major rating agencies.
The two tax-exempt series amount to $129.6 million and have maturities ranging from 2013 through 2026. Pricing details were not available by press time.
The two taxable series total $62.1 million. The first series of $58.6 million of various purpose unlimited tax refunding bonds were priced at par with a 0.572% coupon in 2014 to a 2.449% coupon in 2022. The bonds were priced 30 basis points to 80 basis points above the comparable Treasury yield. Bonds maturing in 2013 were offered via sealed bid.
The second taxable series, $3.5 million of various purpose limited tax refunding bonds, were priced at par ranging from a 0.572% coupon in 2014 to a 1.596% coupon in 2018. Credits maturing in 2013 were offered via sealed bid. The bonds were priced 30 basis points to 60 basis points above the comparable Treasury yield.
In the secondary market, trades compiled by data provider Markit showed firming. Yields on Fresno, Calif., sewer 5s of 2021 and Irving, Texas, Independent School District 5s of 2021 dropped three basis points each to 1.66% and 1.79%, respectively.
Yields on Arizona Health Facilities Authority 5s of 2034 also fell three basis points to 4.27%.
Yields on Kansas City, Mo., 5s of 2023 and New Jersey’s Union County 3s of 2022 dropped one basis point each to 2.08% and 2.06%, respectively.
On Monday, the 10-year Municipal Market Data yield and the 30-year yield dropped three basis points each to 1.76% and 2.90%, respectively. The two-year closed at 0.29% for the 23rd consecutive session.
Since munis began the most recent rally on Aug. 21, the 10-year yield has plummeted 14 basis points while the 30-year yield has plunged 12 basis points, pushing yields down to levels not seen since early August.
The 10-year MMD yield is now trading 16 basis points above its record low of 1.60% set July 26 and the 30-year yield is hovering 11 basis points above the 2.90% record low set July 25.
Treasuries posted gains on Monday. The benchmark 10-year yield dropped four basis points to 1.65% while the 30-year yield fell three basis points to 2.76%. The two-year was steady at 0.28%.
Since the most recent rally began a week ago, muni-to-Treasury ratios have risen as munis underperformed Treasuries and became comparatively cheaper. The five-year ratio jumped to 101.4% on Monday from 87.3% a week prior. The 10-year ratio increased to 106.7% from 103.3% at the start of the rally. The 30-year ratio rose slightly to 105.1% from 102.7%.
Munis tell a different story when looking at ratios throughout the month of August. Munis have outperformed Treasuries and become relatively more expensive. The five-year ratio dropped slightly to 101.4% from 101.6% at the beginning of the month. The 10-year ratio fell to 106.7% from 108.5%. The 30-year ratio dropped to 105.1% from 109.6% at the beginning of August.
Looking ahead to the rest of the week, the bond market will turn its attention to the Fed’s annual symposium in Jackson Hole, Wyo., where Chairman Ben Bernanke is expected to speak on Friday.
For the most part, there should not be a lot of movements in the bond market ahead of the meeting, according to Brian Rehling, chief fixed income strategist at Wells Fargo Advisors. But what is said during the meeting will have an effect.
“He could do what he did last year where he pretty much intimated that Operation Twist was coming,” Rehling said. “But there is no likelihood that Bernanke will announce definitive action. He could hint that something is coming in September. But it’s probably more likely that since the data has been better lately, that the markets will be disappointed in his comments. I think the market is looking for a definitive state of having additional accommodation in September and I’m not sure that will be on the agenda.”
Rehling added that bonds appear to have priced in the likelihood of quantitative easing after the Federal Open Market Committee minutes were released last Wednesday. But, he noted those minutes were stale — released three weeks after the meeting — and that the market is reading too much into those minutes.
“If rates go down to 1.50% it’s a high likelihood that QE is coming,” he said. “And if it’s up to 1.80%, it’s likely that QE is not coming. But we’re sitting in the middle so we haven’t quite figured out which way to go. The markets aren’t sure whether to believe the FOMC minutes from the late July meeting or whether to believe data over the last few weeks that has turned more positive.”
Rehling said if the Fed does not give a definite answer on Friday regarding QE, the next big date to watch will be employment data, released on Sept. 7. “The August employment report will be key ahead of the next FOMC meeting. And I don’t think the Fed will decide what to do until after a look of that employment data.”
