The tax-exempt market handled the year’s largest weekly new issuance fairly well, as traders noted that even though yields rose, munis are still very expensive and demand remains strong.
After digesting $2 billion of California general obligation bonds last week — and seeing price cuts in the institutional order period — the tax-exempt market will get hit with $1.5 billion of Puerto Rico refunding bonds this week.
“The music has stopped,” said a Chicago trader. “People are recovering from the week. There is also a bunch of supply on the horizon and there wasn’t any deal last week that had the power to reprice the market. But this week, there is that deal.”
He added there are still a lot of balances left over from the past two weeks’ deals but “the paper in the pipeline is not moving.”
“Again, we discuss the asset class comparison and the total return that is perceived possible in equities versus munis,” the trader said. “Greed has taken over for fear in some ways. You see the Dow Jones Industrial Average at 13,000 and equity analysts talking up the stock market. How can you then justify getting 2% for 10 years?”
Munis were steady to weaker Friday, according to the Municipal Market Data scale, and for the week, yields also rose across the curve. The 10-year yield rose four basis points throughout the week while the 30-year yield rose two basis points. The two-year was steady.
On Friday, the two-year yield ended at 0.26%, tying its record-low first recorded by MMD on Feb. 16. The 10-year yield ended at 1.91% and the 30-year closed at 3.27% for the week.
Treasuries were stronger Friday. The two-year yield fell two basis points to 0.28% while the 30-year yield dropped three basis points to 3.12%. The benchmark 10-year yield fell four basis points to 1.99%. In the primary market Friday, Bank of America Merrill Lynch priced for retail $150 million of Maryland general obligation bonds, rated triple-A by the rating agencies. Pricing details were not available by press time. Institutional pricing is expected Tuesday.
Looking to the primary market this week, $8.85 billion is expected to come to market, according to Bond Buyer estimates. In the negotiated market, $6.61 billion is expected, up from last week’s revised $3.56 billion. On the competitive calendar, $2.23 billion is expected, up from last week’s revised $1.88 billion.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board over the past week showed weakening. Bonds from an interdealer trade of Oregon 5s of 2027 yielded 2.53%, five basis points higher than where they traded the week before.
A dealer bought from a customer Massachusetts Water Resources Authority 5s of 2024 at 2.37%, five basis points higher than where they traded at the beginning of the week. A dealer sold to a customer New York Liberty Development Corp. 5s of 2041 at 3.90%, two basis points higher than where they traded the previous week.
Over the week, ratios rose as munis underperformed Treasuries with tax-exempts getting cheaper. The 10-year ratio Friday closed at 96%, up from 94.4% the prior week. The 30-year ratio ended at 104.8%, steady from the week before.
