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Market Close: Worst 3-Day Loss In Quarter Century Tests Issuers

A handful of issuers is expected to brave the primary market Wednesday after the municipal bond selloff waned following the biggest three-day plunge in more than a quarter century.

De La Rosa is expected to price $1.3 billion of Los Angeles tax and revenue anticipation notes on Wednesday, and Wells Fargo should price $1.3 billion of Illinois general obligation bonds.

Other issuers, including triple-A rated Georgia and the Pennsylvania Housing Finance Agency, have postponed offerings, citing market conditions.

In the Thursday, Friday and Monday selloff following Federal Reserve chairman Ben Bernanke’s comments on tapering its bond-buying program, the Municipal Market Advisors and Municipal Market Data yields jumped nearly 60 basis points, the biggest three-day increase since April 1987.

MMD and MMA 10-year yields jumped to the highest levels since May 2011, while 30-year yields rose to the highest since August 2011.

The 10-year MMA yield jumped 57 basis points in three trading sessions to 2.96% on Monday, while the 30-year yield rose 54 basis points in three sessions to 4.23%.

The 10-year MMD yield rose 52 basis points in three sessions, to 2.80% and the 30-year yield rose 55 basis points to 4.13%.

“It’s been a long, tough march,” an Atlanta trader said.

The selloff prompted issuers to postpone deals, including last week’s $763 million of California Health Facilities Financing Authority, $350 million of New York’s Metropolitan Transportation Authority and $250 million of California’s City of Hope.

This week, triple-A rated Georgia pulled its $157 million advance-refunding auction. In addition, Pennsylvania Housing Finance Agency postponed its $129 million of single-family mortgage revenue bonds.

The plunge in prices put the Standard & Poor’s Dow Jones municipal bond indices on track to post their worst monthly returns in almost five years.

Investment-grade municipal bonds tracked in the Standard & Poor’s National AMT-Free Municipal Bond Index have posted negative total return of 4.97% so far in June, heading for their worst month since September 2008 when the index sank 5.13%.

The yield to worst on bonds in the index has risen by 95 basis points since the end of May, according to Standard & Poor’s Dow Jones Indices.

High yield muni bonds tracked in the Standard & Poor’s Municipal Bond High-Yield Index returned a negative 7.08% so far this month, the worst since December 2008 when it returned negative 9.12%. Yields of bonds in the index have risen by 88 basis points for the month of June so far.

The Bond Buyer’s Municipal Bond Index hasn’t fared much better. Monday’s index of 108-10 is the lowest since May 3, 2011, when it was 108-03. Monday’s average yield to par call of 6.35% is the highest since Feb. 10, 2011, when it was also 6.35%.

The average yield to maturity of 5.19% is the highest since July 29, 2011, when it was 5.24%.

The index has dropped 12-31/32 in the past five business days from 121-09 to 108-10. That is the single largest one-week decline in the index since it began in 1984. The previous record was 10-29/32 during Oct. 6-14, 2008, when the index fell from 101-03 to 90-07.

The percentage decline in the index over the past five business days of 10.684% is also the largest on record. The previous record was Oct. 6-14, 2008, when the index declined 10.682%.

In the markets Tuesday, the selloff started to slow and traders said some buyers started to show interest.

“There is buying interest and people are looking at offerings but there is still a heavy tone,” the Atlanta trader said. “There are still sellers, no question.”

Buyers emerged on the long end as 5% coupon bonds traded at a discount. “The long 5s at a discount are trading but it seems like things are also getting a look in the 10-year range now,” he said.

Other traders said there was still definitive selling, just not as much as the three previous sessions.

“It feels better but there are huge bid lists out there still,” a New York trader said. “There is a lot of trading so the market feels better but the huge bid lists are concerning.”

The trader added that the New York State Environmental Facilities Corp. got $150 million in retail orders Monday.

“I think it’s a good sign the Environmentals did well. It’s a good name that doesn’t come out often and spreads are attractive,” the trader said. “It could be a sign of things to come.”

On Tuesday, Citi priced for institutions $403.4 million of New York State Environmental Facilities Corp. state clean water and drinking water revolving funds for New York City Municipal Water Finance Authority projects. The bonds are rated Aaa by Moody’s Investors Service, AAA by Standard & Poor’s and AA-plus by Fitch Ratings.

Yields ranged from 0.18% with a 3% coupon in 2014 to 4.46% with a 4.375% coupon and 4.34% with a 5% coupon in a split 2033 maturity. The bonds are callable at par in 2023. Yields were lowered in repricing as much as 11 basis points.

Interactive Data said the wider spreads were a direct result of the selloff. The New York State Environmental bond offering “was offered at plus 50 basis points off the 10-year triple-A scale,” according to analysts at Interactive Data. “A week ago, the level would have been closer to plus-20 basis points off the 10-year spot,” the firm said.

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Are the YTC correct in this article?
Posted by Bob C | Tuesday, June 25 2013 at 9:51PM ET
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