The tax-exempt market ended higher Tuesday for the third trading session as traders said a combination of an active retail market, attractive munis on a taxable equivalent basis, and fundamental supply and demand factors all contributed to higher prices.
“There is definitely money being put to work,” a trader located in the Southeast region said. “When I saw money go into stock funds I thought people would bail on bonds but that’s not the case.”
He added there are several factors that are driving the rally, including limited supply and higher tax rates. “The fact that tax rates are now set at 39% and the 28% cap on exemption isn’t the foregone conclusion anymore, retail is looking at munis and saying these levels are as cheap as they have ever been on a taxable equivalent basis.”
He noted one triple-A muni bond yielded 1.20% with a 2020 maturity and had a taxable equivalent yield of almost 2%. That is compared to a U.S. Treasury, with a similar maturity, yielding 1.25%.
“There is still not a lot of paper around,” he added. “In some states there are two to three high-grade type offerings and not a lot to choose from.”
Once a few more deals price in the primary, the market will be able to settle, the trader added. With limited supply last week and a manageable supply this week, some price discovery is still happening. “We are still in price discovery to some extent. Then the secondary improves on these levels and everyone is seeing what the next wave of deals does. And I think these levels are going to hold.”
Other traders agreed the market was higher because of basic supply and demand patterns.
“It’s stronger again here today,” a New Jersey trader said. “It seems like retail is buying. The primary is quiet and overall in the secondary it seems two to three basis points up. There is still not a lot of product. The primary is light so people are bidding up whatever is left over from last year and it’s starting to trade.”
He added the $500 million New York Metropolitan Transportation Authority deal was expected to get good traction from retail.
In the primary market, Citi priced for retail the MTA revenue bonds, rated A2 by Moody’s Investors Service and A by Standard & Poor’s and Fitch Ratings. Institutional pricing is expected Wednesday.
Yields ranged from 0.50% with a 2% coupon in 2014 to 3.39% with a 5% coupon in 2043. Bonds maturing in 2013 were offered via sealed bid. The bonds are callable at par in 2023.
Bank of America Merrill Lynch priced for institutions $317.5 million tax-exempt and taxable senior revenue refunding bonds for the Louisiana Stadium & Exposition District.
The deal consisted of $271.3 million of tax-exempt securities ranging from a 4% coupon in 2017 to 3.625% and 5% coupons in a split 2036 maturity. Prices were not available by press time.
The deal also consisted for $46.2 million of taxable bonds.
JPMorgan priced $242.5 million of Mayor and City Council of Baltimore tax-exempt and taxable general obligation bonds for the city. The bonds are rated Aa2 by Moody’s and AA-minus by Standard & Poor’s.
Yields on the first series, $46.3 million of tax-exempt consolidated public improvement bonds, ranged from 0.18% with a 1% coupon in 2013 to 3.05% with a 3% coupon in 2032. The bonds are callable at par in 2022.
Yields on the second series, $164.7 million of tax-exempt consolidated public improvement refunding bonds, ranged from 0.15% and 0.18% with 1% coupons in a split 2013 maturity to 2.31% with a 4% coupon in 2025. The bonds are callable at par in 2022.
The underwriter also priced $13.7 million and $17.8 million of taxable debt.
In the secondary market, trades compiled by data provider Markit showed firming across the board.
Yields Arizona’s Salt River Project Agricultural Improvement and Power District 5s of 2039 dropped six basis points to 2.24% while Pennsylvania Housing Finance Agency 3.3s of 2032 fell four basis points to 3.30%.
Yields on New Jersey’s Tobacco Settlement Financing Corp. 5s of 2041 and Port Authority of New York and New Jersey 3s of 2034 fell three basis points each to 5.68% and 3.14%, respectively.
Yields on California 5s of 2032 and New York 5s of 2029 dropped two basis points each to 2.87% and 2.51%, respectively.
On Tuesday, the Municipal Market Data scale ended higher for the third trading session. The two-year and 10-year yield fell one basis point each to 0.33% and 1.68%, respectively. The 30-year yield dropped two basis points to 2.72%.
The 10-year yield still remains 21 basis points above its record low of 1.47% set Nov. 28. The 30-year yield trades 25 basis points above its record low of 2.47% set Nov. 28.
Treasuries ended stronger for the third consecutive trading session. The benchmark 10-year yield and the 30-year yield dropped three basis points each to 1.83% and 3.02%, respectively. The two-year yield fell one basis point to 0.25%.
