Continuing a new-year trend, the tax-exempt market started firm Monday and ended firmer. Munis rallied the first week of trading and continued into the second week as yields were at or within one basis point of record lows.
“The market maintained the positive tone that it exhibited for most of last week, no doubt helped along by a rallying Treasury market for most of the day,” said a trader in New York.
He added that the “intermediate high-grade sector was very well bid in the secondary as vaunted January reinvestment money continues to keep the wind at our backs and primary market supply remains light.”
The trader said he also saw interesting trades Monday for bank-eligible general obligation bonds. “I saw some pretty significant trades on Pennsylvania, Georgia and Washington GO bank-eligible bonds in the 15-year part of the muni curve at levels between 30 and 50 basis points through the Municipal Market Data scale.”
The focus Monday was all on supply and demand with a lack of supply creating heightened demand.
“We are firmer again,” a New Jersey trader said. “You just can’t keep product on the shelf very long. And demand is climbing the market higher.” He added there are not a lot of new bonds in the market right now, and the 30-day visible supply isn’t very high, so lack of supply is pushing demand higher.
By the end of the day Monday, munis strengthened across the curve, according to the MMD scale. The two-year yield fell two basis points while the three-year yield fell one basis point. The four-year yield dropped two basis points while the five-year fell one basis point.
Yields on the six-year to eight-year were flat. The nine-year fell one basis point, the 10-year dropped two basis points, and the 11-year and 12-year fell three basis points each. Yields outside the 13-year plummeted, falling five and six basis points.
The two-year yield fell two basis points to 0.40% Monday. The 10-year yield closed down two basis points to 1.83%, tying the record low as recorded by MMD Dec. 30.
The 30-year fell five basis points to 3.45%, only one basis point above the record low of 3.44% recorded by MMD on Sept. 23.
Treasuries ended the day only slightly stronger. The two-year yield and the benchmark 10-year yield each fell one basis point to 0.26% and 1.96%, respectively. The 30-year yield held steady at 3.02%.
“With rates being where they are, we’re seeing an uptick in issuance volume in terms of refunding-type transactions, and that’s what we are working on with issuers,” said a financial advisor in Connecticut. “We expect to see that right out of the gates. Rates are just so low.”
In the primary market Monday, PNC Capital Markets priced for retail $171.5 million of Ohio bonds rated Aa1 by Moody’s Investors Service and an equivalent AA-plus by Standard & Poor’s and Fitch Ratings.
Yields on the first series, $80 million of third frontier research and development GOs, ranged from 0.55% with a 2% coupon in 2013 to 2.12% with a 5% coupon in 2021. Credits maturing in 2012 were offered via sealed bid.
Yields on the second series, $12 million of coal development GOs, ranged from 0.62% with a 2% coupon in 2014 to 2.21% with a 2.125% coupon in 2022. Credits maturing in 2013 were offered via sealed bid.
The third series, $79.5 million of common schools refunding GOs had yields ranging from 2016 to 2022 and were not offered for retail.
In the competitive market Monday, Bank of America Merrill Lynch won the bid for $92.8 million of Plano, Texas, Independent School District GOs. The credit is rated Aaa by Moody’s and AAA by Standard & Poor’s.
Yields ranged from 0.18% with a 4% coupon in 2013 to 2.41% with a 4% coupon in 2023. Credits maturing from 2014 to 2017, 2021, 2022 and from 2024 to 2037 were sold but not available. The bonds are callable at par in 2021.
Th deal “appeared to get a pretty aggressive price versus where comparable bonds were trading in the secondary market,” the New York trader said.
In the secondary, trades reported by the Municipal Securities Rulemaking Board showed firming.
A dealer sold to a customer California 7.625s of 2040 at 5.59%, 15 basis points lower than where they traded Friday.
Bonds from an interdealer trade of California Public Works Board 5s of 2028 yielded 4.27%, eight basis points lower than where they traded Friday.
Bonds from an interdealer trade of Puerto Rico Sales Tax Financing Corp. 5.5s of 2037 yielded 4.36%, seven basis points lower than where they traded Friday.
Looking more into what 2012 can expect from the municipal market, certain sectors of muni bonds will be more of a focus than others, according to John Hallacy, municipal research strategist at Bank of America Merrill.
Public power is one sector that should be looked at this year as capital plans may be required to meet new environmental regulations, Hallacy said.
Pending regulations will establish standards to limit toxic aerial emissions for coal-fired and oil-fired generators, and limit upwind sulfur dioxide and nitrogen oxide emissions. The regulations will require a “substantial portion of the existing coal plants to be retrofitted, or retired and replaced.”
Municipal bond issuance in the public power sector should increase in 2012 and 2013 in part to meet the new standards, Hallacy said.
“Several public power agencies have large-scale projects to address the environmental emissions standards, and we expect others to address their capital needs once the scope and timeframe for compliance with pending regulations is finalized,” he said.
