The tax-exempt market finished on a strong note Thursday after a big rally Wednesday as the election cleared away any uncertainty and traders were more comfortable moving money.
After a strong Wednesday, municipal bonds rallied Thursday, though traders noted there was much less momentum.
“It’s a mixed bag of moving paper into this rally and keeping stuff moving, but it’s more cautious today without a doubt,” a New Jersey trader said. “It’s not like yesterday and a little quiet. There is not as much out to bid.”
That said, the trader noted the market was still firmer. “It’s a little stronger by a few basis points.”
In the morning trading session, traders said the market appeared to take a pause after a hectic Wednesday. “It seems like munis are taking a bit of a breather,” a New York trader said, following a huge global fixed-income rally Wednesday. “I wouldn’t say munis are weaker. They are steady, but it’s not like Wednesday where everyone was buying everything.”
As munis continue to digest the news about the election, trading has increased as uncertainty subsided and traders realize tax-exempts could be much more attractive as taxes are expected to increase in 2013.
“Well the speculation that the market was only waiting for the election results before activity picked up was accurate,” wrote Dan Toboja of Ziegler Capital Markets. “Bonds that had been floating around as offers without any traction began trading and recent new issues were the first to get support. Part of the rally in munis can be credited to presumed tax increases beginning in the new year.”
But, with the fiscal cliff looming only a few months away, the tax-exempt market is facing a real threat.
“There’s also increased concern that there’s a very real risk to muni tax exemption which will cheapen demand if it appears likely in the near future; as the fiscal cliff comes closer there will be increased pressure to at least cut part of the tax exemption” Toboja said.
“Basically while activity significantly picked up there are a lot of questions that still need to be answered,” he said. “Munis may well have an exciting Q4 as the picture becomes clearer.”
In the primary market, Siebert Brandford Shank & Co. priced for institutions $460.2 million of New York’s Metropolitan Transportation Authority bonds, following a retail order period Wednesday. The bonds are rated A2 by Moody’s Investors Service and A by Standard & Poor’s and Fitch Ratings.
Yields on the first series, $350 million of transportation revenue bonds, ranged from 0.50% with 4% and 5% coupons in a split 2014 maturity to 3.35% with a 5% coupon in 2042. Credits maturing in 2013 were offered via sealed bid. The bonds are callable at par in 2022. Yields were lowered as much as 16 basis points from retail pricing on the long end.
Yields on the second series, $110.2 million of transportation revenue bonds, ranged from 0.92% with a 5% coupon in 2016 to 2.50% with a 5% coupon in 2023. The bonds are callable at par in 2022. Yields were lowered eight basis points from retail pricing.
Barclays held preliminary pricing for $386.2 million of Dallas Independent School District unlimited tax refunding bonds, with underlying ratings of Aa2 by Moody’s, AA-minus by Standard & Poor’s, and AA by Fitch. The bonds are triple-A rated because they are guaranteed by the Texas School Fund Guarantee Program.
Yields ranged from 0.47% with a 4% coupon in 2015 to 3% priced at par in 2031. Credits maturing in 2013 were offered via sealed bid. The bonds are callable at par in 2022.
JPMorgan priced $191.4 million of Illinois Finance Authority revenue bonds for the Centegra Health System, rated A-minus by Standard & Poor’s and Fitch.
Yields ranged from 2.13% with a 5% coupon in 2018 to 4.10% with a 5% coupon in 2038. The bonds are callable at par in 2022.
Loop Capital Markets priced $128 million of Dallas Area Rapid Transit senior lien sales tax revenue bonds, rated Aa2 by Moody’s and AA-plus by Standard & Poor’s.
Yields ranged from 0.229% with a 1% coupon in 2013 to 2.99% with a 5% coupon in 2042. The bonds are callable at par in 2022.
In the competitive market, Citi won the bid for $142.4 million of Virginia College Building Authority educational facilities revenue bonds, rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch.
Yields ranged from 0.47% with a 5% coupon in 2015 to 3.35% with a 3.25% coupon in 2042. Bonds maturing in 2013 and 2014 were offered via sealed bid. The bonds are callable at par in 2022.
On Thursday, the Municipal Market Data scale post gains and set new record low yields. The 10-year yield dropped four basis points to 1.59%, setting a new record low as recorded by MMD. The 1.59% broke the previous record low of 1.60% set July 26.
The 30-year MMD yield fell five basis points to 2.69%, breaking the previous record low of 2.74% set Wednesday. Wednesday’s record broke the previous low of 2.79% set July 25. The two-year finished steady at 0.30% for the 31st consecutive trading session.
Treasuries were weaker Thursday morning before turning sharply positive in the afternoon. The two-year yield and the benchmark 10-year yield ended steady at 0.26% and 1.62%, respectively. The 30-year yield plunged six basis points to 2.76%.