The tax-exempt market was weaker after investors had enough of a week-long rally that slashed yields some 25 basis points in the belly of the curve.
Primary deals saw good reception this week on lower supply, but secondary trades started fading by Thursday morning.
“There is not a lot going on,” a New York trader said. “It’s kind of quiet. The primary is dead today and the secondary is very quiet.”
Other traders agreed. “Yesterday and today have been very quiet in the secondary,” a second New York trader said. “Primary deals are still getting a good response.”
Indeed, munis were much weaker according to data compiled by Markit. Out of a sample of eight CUSIP numbers, three were weaker compared to a sample of 11 CUSIPs that were all stronger on Tuesday.
The weaker bonds included Puerto Rico Public Buildings Authority 5.65s of 2028, New Jersey Economic Development Authority 5s of 2021 and Dallas-Fort Worth International Airport 5s of 2031.
Munis were slightly weaker, according to the Municipal Market Data scale. Yields inside six years were steady while the seven- to 23-year yields jumped up one and two basis points. Outside 24 years, yields were flat.
On Thursday, the two-year yield finished steady at 0.36% for its ninth consecutive trading session and the 30-year finished flat at 3.37%. The 10-year yield rose one basis point to 2.09%.
Treasuries were stronger. The benchmark 10-year yield fell three basis points to 2.17%, while the 30-year yield dropped two basis points to 3.28%. The two-year was steady at 0.34%.
In the primary market, Barclays priced $101 million of Fulton County, Ga., Development Authority revenue bonds, rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s.
Yields on the first series, $79.6 million of tax-exempt revenue bonds, ranged from 1.39% with a 4% coupon in 2017 to 3.38% with a 5% coupon in 2031. The bonds are callable at par in 2022.
Yields on the second series, $21.4 million of taxable revenue bonds, ranged from 0.50% priced at par in 2012 to 1.887% priced at par in 2017. The bonds priced 40 basis points to 88 basis points above the comparable Treasury yield.
In other primary market news, the University of Pennsylvania Trustees said they plan to issue $250 million of general purpose century bonds that could be sold as early as Friday. The bonds mature in 2112 and will be priced by JPMorgan, Goldman, Sachs & Co., and Morgan Stanley. The credit is rated Aa2 by Moody’s and AA-plus by Standard & Poor’s.
The University of Pennsylvania follows several other highly rated universities that have issued century bonds recently. In February, the University of California sold $500 million of 100-year bonds, rated Aa1 by Moody’s.
Last year, Ohio State University came to market with about $300 million of bonds featuring 100-year maturities with double-A ratings. Earlier in 2011, the triple-A-rated Massachusetts Institute of Technology and double-A-rated University of Southern California floated 100-year bonds.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening.
A dealer bought from a customer Dormitory Authority of the State of New York 5.25s of 2029 at 0.51%, 12 basis points higher than where they traded the week before.
A dealer bought from a customer Arizona Transportation Board 5s of 2014 at 0.64%, five basis points higher than where they traded the week before.
A dealer bought from a customer California Department of Water Resources 5.375s of 2018 at 0.19%, four basis points higher than where they traded two weeks before.
A dealer sold to a customer Massachusetts 5s of 2025 at 0.51%, two basis points higher than where they traded the week before.
On Wednesday, Jefferson County, Ala., said it will no longer make payments on its general obligation warrants, starting with interest payments of $15 million due April 1. A total of $200.5 million of GOs are outstanding in Series 2001B, 2003A and 2004A warrants. The 2003 and 2004 GO warrants are insured by National Public Finance Guarantee.
The halt on the payments comes after Jefferson County filed the largest municipal bankruptcy in U.S. history last November. Reaction in the secondary market was muted.
“Trader sentiment is correct. JeffCo credit is kryptonite, and has been for a while,” an MMD analyst tweeted. “My sense is that this outcome is priced in the market.” Indeed, “the silence is deafening in JeffCo secondary market trading today,” he said.
A New York trader agreed that the announcement had little impact on trading, saying: “Bond trading is real low because the bond is just a piece of junk.”
In terms of coupon structure, analysts at JPMorgan say 4% coupons have liquidity and are trading closer to par.
“We believe that 4% structure will continue to perform well for up to a 20 basis point increase in high-grade yields,” wrote Peter DeGroot, a municipal analyst.
“Longer dated 4s trade close to the coupon even as yields rise due to strong retail demand for slightly discounted structures. The performance of 4% bonds would drop off considerably given an increase in yields of 25 basis points or more,” he said.
