Munis End Firmer As Fatigue Sets In

The tax-exempt market ended on a stronger note Thursday even as traders said the market was hitting a wall with near record-low yields.

Munis followed Treasuries higher after several days of what traders described as a tired market.

“We are up two to three basis points right now, but there’s not a lot of action,” a New York trader said. “It’s a similar tone to yesterday afternoon and a little quiet. But definitely better buyers this afternoon.”

Though the market seemed to pick up in the afternoon, morning trading was sluggish. “Treasuries are higher but we are not seeing a stronger bid,” another New York trader said. “Yields are starting to run up again from these absolute levels and struggling to find buyers.”

“We ran out of gas Wednesday and had quite a bit of underperformance,” he said. “Even though Treasuries came back, we were off 10 basis points at some points [across the curve]. We are rejecting the all-time low yields.”

Even with a decent amount of supply this week, munis struggled. “There were some multi-hundred-million-dollar deals, but with yields where they are, we are starting to reach a fatigue point,” he said.

Munis ended Thursday firmer, according to the Municipal Market Data scale. Yields inside eight years were steady, while yields outside nine years dropped between one and four basis points.

On Thursday, the 10-year yield and the 30-year yield each dropped two basis points to 1.78% and 3.09%, respectively. The two-year yield remained steady at 0.31% for the 22nd consecutive trading session.

The Treasury yield curve flattened. The two-year yield jumped three basis points to 0.32%. The benchmark 10-year yield dropped five basis points to 1.71% while the 30-year yield plummeted 10 basis points to 2.80%.

In the primary market, Morgan Stanley priced $315.5 million of North Hudson, N.J., Sewerage Authority taxable and tax-exempt revenue bonds, rated A-minus by Standard & Poor’s and A by Fitch Ratings.

Yields on $164.9 million of tax-exempt gross revenue senior-lien lease certificates ranged from 1.46% with a 4% coupon in 2016 to 4.25% with a 5% coupon in 2042. The bonds are callable at par in 2022. Yields were lowered as much as two basis points on the short end from preliminary pricing and as much as eight basis points on the long end.

Yields on $150.6 million of taxable gross revenue senior-lien lease certificates ranged from 1.89% priced at par in 2017 to 5.396% priced at par in 2042. Yields ranged from 200 basis points to 255 basis points above the comparable Treasury yield.

Wells Fargo Securities priced $160.1 million of Chatham County, Ga., Hospital Authority revenue bonds, rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s. The bonds had maturities ranging from 2018 to 2034. Pricing details were not available by press time.

In the secondary, trades reported by the Municipal Securities Rulemaking Board showed weakening throughout the week.

A dealer sold to a customer New York State Environmental Facilities Corp. 5s of 2022 at 1.95%, seven basis points higher than where they traded Wednesday. Bonds from an interdealer trade of Metropolitan Transportation Authority 4.25s of 2042 yielded 4.20%, four basis points higher than where they traded Wednesday.

Bonds from an interdealer trade of Wayne County, Mich., 3s of 2014 yielded 2.75%, three basis points higher than where they traded Monday. A dealer sold to a customer Michigan 3s of 2016 at 1.18%, one basis point higher than where they traded Monday.

In a sample of CUSIP numbers provided by data provider Markit, trades in the secondary market showed a mix, although the majority of the trades were stronger.

Yields on Ohio 5s of 2022 dropped five basis points to 2.18% while San Diego Water Authority 5s of 2022 fell two basis points to 2.12%. Illinois 5.1s of 2033 and Dormitory Authority of the State of New York 4s of 2020 each fell one basis point to 5.61% and 2.08%.

A key theme in the muni market that has pushed yields down to near record-low levels has been the “powerful pull of the demand side, which has allowed muni yields to keep pace with the powerful rally in Treasuries,” Citi analysts wrote.

The analysts expect positive momentum to continue, given the large amount of cash with near-zero yields investors hold, too-short average maturity of individual muni portfolios, a large amount of higher-yielding paper that investors are losing to bond calls, and strong demand from institutional investors.

The analysts also noted there has been a record level of bond calls and maturities, which has led to negative net supply in 2011 and is likely to do so again in 2012, despite higher issuance.

And though new issuance is higher so far in 2012, maturities are shorter.

“The average maturity of new supply remains far below that in many past years, with nearly 60% of issuance in refundings, and most of that in the form of current or near-current refundings with considerably shorter final maturities, on average, than on new issues,” the analysts wrote.

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