Munis continue to firm, setting new record lows with each passing day. On Thursday, they proved they could defy Treasuries, climbing higher even as the government bonds weakened.
On Thursday, the two-year to four-year yields fell two basis points. Yields on the five-year and six-year were steady, while yields on the seven-year fell two basis points. Outside the eight-year maturity, yields plunged between three and six basis points.
The two-year was quoted near the end of the session at 0.35%. The 10-year fell three basis points to close at 1.76%, beating the previous Municipal Market Data record of 1.79%, which was set Wednesday. The 30-year dropped four basis points to 3.29%, beating the previous record of 3.33% established Wednesday.
Since Monday, the two-year has fallen five basis points, the 10-year yield has fallen seven basis points, and the 30-year yield has dropped an astonishing 16 basis points.
Meanwhile, Treasuries weakened Thursday. The benchmark 10-year yield increased two basis points to 1.93%. The two-year and the 30-year yields held steady at 0.24% and 2.97%, respectively.
“Many of the same themes that drove the market this week continue Thursday,” a trader in New York said. “Munis remain well bid as dealers continue to reach for product, particularly in the long end of the curve. This is in spite of a slightly weaker Treasury market.”
“Customer bid-wanted lists appear to be garnering strong levels, particularly for high-grade names, and early indications on some of the negotiated supply of the day point to oversubscription and upward price adjustments,” he said.
However, some traders were less optimistic, and are waiting for a correction in the market soon. “Munis are continuing to have a very firm tone,” a trader in Chicago said. “But activity is so muted there is a degree of resistance to nominal low yields.”
While there is “money to be put to work, we may see a pushback in yields,” he said.
In the primary market, Bank of America Merrill Lynch priced for institutions $178.4 million of Florida’s JEA electric system revenue bonds in two series. The deal was priced for retail investors Wednesday and prices were bumped five to 10 basis points Thursday inside the 10-year.
Yields on the first series, $63.7 million of electric system revenue bonds, ranged from 2.59% with a 4% coupon in 2023 to 3.74% with a 4.5% coupon in 2033. The bonds are callable at par in 2021. The credit is rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s and Fitch Ratings.
Yields on the second series, $114.7 million of electric system subordinated revenue bonds, ranged from 0.35% with a 2% coupon in 2012 to 4.04% with a 4% coupon in 2033. The bonds are callable at par in 2021. The credit is rated Aa3 by Moody’s, A-plus by Standard & Poor’s, and AA-minus by Fitch.
On the competitive calendar, the township of Livingston, N.J., auctioned about $60 million of general obligation bonds in two pricings, a $6.38 million deal followed by a $53.67 million issue. The credit is rated Aa2 by Moody’s.
Bank of America Merrill won the larger deal. Yields ranged from 0.47% with a 3% coupon in 2014 to 3.07% with a 3% coupon in 2029. Credits maturing in 2013, 2022, 2023 and from 2030 to 2042 were sold but not available. The bonds are callable at par in 2022.
In the secondary market, trades of tobacco bonds reported by the Municipal Securities Rulemaking Board showed hefty gains.
Bonds from an interdealer trade of Alaska’s North Tobacco Securitization Corp. 5s of 2046 yielded 7.05%, 27 basis points lower than where they traded a week before. A dealer sold to a customer Iowa Tobacco Settlement Authority 6.5s of 2023 at 7.22%, 13 basis points lower than where they traded last week. A dealer bought from a customer California’s Golden State Tobacco Securitization Corp. 5s of 2045 at 5.11%, 11 basis points lower than where they traded earlier this week.
Looking into 2012, certain sectors of municipal bonds may be more interesting this year than in the past, according to John Hallacy, municipal research strategist at B of A Merrill — including transportation.
While the that sector will experience continued uncertainty over federal funding, the dramatic decline in new issuance in 2011 should help a 2012 surge in transportation bonds.
“In 2012, we expect a rebound in transportation issuance of about $30 billion, driven largely by new money as an improving economy creates greater demand for mobility,” Hallacy said. “An expansion of the surface transportation network, as well as major capital maintenance investments, will be undertaken by these projects.”
Transportation bonds may be poised to outperform this year. Spreads remain wide with the average double-A spread to the MMD scale around 69 basis points, and the single-A spread at 102 basis points, and the triple-B spread around 215 basis points, according to Bank of America’s global research.
“Given the current appetite for high yields, we would expect more attractive relative performance of transportation bonds over other high-grade sectors,” Bank of America said.
