The tax-exempt market ended steady to slightly weaker as traders said there was a lull in activity despite a few deals pricing for retail Monday.
“It’s very slow today,” a Boston trader said. “The phones are barely ringing.”
Other traders agreed the market was quiet and trading weaker. “It’s kind of slow today,” a New Jersey trader said. “New York City GOs are coming out for retail again. It looked full on Friday and was priced on the market or a tad on the offered side.”
He added dealers are looking to loosen up inventory as the end of the year approaches. “There was not a lot of turnover in the market so it looks like people are heavy and that makes them nervous going into the end of the year.”
And while there is an uptick in supply this week and munis are trading a touch weaker, most market participants don’t think munis will face a big selloff anytime soon. “The 30-day forward supply has increased to close to $13 billion but the final deals of the year look like they will come without issue, as the majority are cleaner general market deals,” wrote Dan Toboja, vice president at Ziegler Capital Markets. “With more drama continuing to unfold in Europe there’s little reason to see weakness into year end.”
In the primary market Monday, Citi held a second retail order period for $850 million of New York City general obligation bonds, rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings. A first retail order period took place Friday and institutional pricing is expected Tuesday. Pricing details were not yet available.
RBC Capital Markets priced for retail $625 million of Connecticut special tax obligation bonds for transportation and infrastructure purposes, rated Aa3 by Moody’s and AA by Standard & Poor’s and Fitch. Institutional pricing is expected Tuesday. Pricing details were not available by press time.
In the secondary market, trades compiled by data provider Markit showed a mix of strengthening and weakening.
Yields on Ohio Hospital Facilities 4.75s of 2020 dropped five basis points to 1.58% while Ceres, Calif., Redevelopment Agency 4s of 2031 fell three basis points to 4.00%.
Yields on California’s Golden State Tobacco Securitization Corp. 5s of 2033 fell two basis points to 5.75% while New York’s Metropolitan Transportation Authority 5s of 2031 dropped one basis point to 2.43%.
Other trades were weaker. Yields on Puerto Rico Sales Tax Financing Corp. 5.25s of 2040 and Georgia State Road and Tollway Authority 5s of 2021 rose one basis point each to 3.63% and 1.22%, respectively. Yields on Klein, Texas, Independent School District 4s of 2020 increased one basis point to 1.21%.
On Monday, the Municipal Market Data scale ended as much as two basis points weaker. The 10-year yield and the 30-year yield rose two basis points each to 1.50% and 2.50%, respectively. The 10- and 30-year yields remain three basis points above their record lows of 1.47% and 2.47%, respectively. The two-year finished flat at 0.30% for the 51st consecutive trading session.
Treasuries ended a choppy session Monday flat to stronger. The benchmark 10-year yield fell one basis point to 1.62%. The two-year and 30-year yields ended steady at 0.25% and 2.81%, respectively.
And while muni yields have traded mostly steady over the past week, yields have fallen throughout the year with the most notable returns in the high-yield market.
JR Rieger, vice president of fixed income at Standard & Poor’s Dow Jones Indices, said the supply and demand imbalance has been exacerbated by the expectation of higher taxes in 2013.
Investment grade muni bonds have returned over 2% for the quarter and 8.39% year-to-date, as measured by the S&P National AMT-Free Municipal Bond Index. The taxable equivalent yield of 2.69% is higher than the Dow Jones Corporate Bond Index, which yields 2.47%.
Similarly, high-yield munis have returned over 4% this quarter and a whopping 18.8% year-to-date, as measured by the S&P Municipal Bond High Yield Index. High-yield munis have a taxable equivalent yield of 7.83%, which outweighs high-yield corporate bond yields of 6.33%, as measured by the Bank of America Merrill Lynch U.S. High Yield Master II Index.
Rieger added the belly of the curve has performed well this year as 10-year non-callable investment grade munis have returned 2.69% and a taxable equivalent yield of 1.96%.
States with higher yields have also seen great returns. California has returned 2.55% so far this quarter and 10.47% year-to-date while Illinois has returned 2.35% this quarter and 10.52% year-to-date.
New Jersey has returned 2.36% this quarter and 10.04% year-to-date while Puerto Rico has returned 1.96% this quarter and 7.34% year-to-date.
While there are still a few weeks left in the year, market participants say 2012 will finish as another great year for municipal bonds. “Reaching historically low nominal yields, 2012 saw the municipal bond market continue as a flight to quality and income-generating asset class,” Rieger said. “But, relative to other fixed-income asset classes, municipal bonds have generated higher yields on a taxable-equivalent yield basis. Low supply of new issues versus high demand for tax-exempt, income-generating assets sustained an imbalance that pushed prices higher.”
Looking to 2013, Rieger added munis could be affected by the uncertainty of tax code changes and the tax treatment of munis. “If any new issue would be taxable as opposed to tax-free at the federal level, demand would increase for tax-exempt bonds already in the secondary market or if the tax-exempt status was to be reduced for high income investors that could have the opposite effect.”
An increase in supply could also affect munis next year and push rates higher. “The introduction of recovery bonds following Hurricane Sandy and the increased supply could potentially reverse the supply-demand imbalance,” Rieger said, adding municipalities could begin to exit the long economic cycle and fund long-term infrastructure projects such as schools, transportation, energy, and jobs creation.
