Market Close: Munis See Light Trading Ahead of Economic Data, New Deals

Light trading activity in the tax-exempt market persisted through Monday's session as momentum slowed from Friday's 10 basis point rally.

Heading into a week that is expected to see fewer new issues pricing in the primary, traders were concerned about committing capital before Wednesday's Federal Open Market Committee meeting announcement, employment data, and possibly another week of muni bond mutual fund outflows.

"It does not feel stronger. It feels flat or maybe weaker," a New Jersey trader said. "All of the big funds have a ton of cash and they are keeping it that way. They don't want to put money to work."

This trader added the month-end statements are coming out again for the retail customer and returns will be negative, probably prompting more outflows. "Cash is king and funds don't want to spend it if there are more redemptions."

There is some buying, this trader said. But it is very selective and in shorter maturing bonds.

Other traders said they were waiting for Aug. 1 reinvestment money before making any big trades. "It's pretty quiet today," a New York trader said. "Month-end is keeping buyers away from trading."

Before pricing some of the week's largest deals, underwriters released pre-marketing wires Monday to test demand.

Citi released a pre-marketing wire on the largest deal of the week, $1.1 billion of Ohio Turnpike Commission bonds. Pricing is expected Tuesday.

The first series of $74.7 million is rated Aa3 by Moody's Investors Service, AA-minus by Standard & Poor's, and AA by Fitch Ratings. The bonds yielded 4.85% with a 5% coupon in 2048 and 64 basis points above the Municipal Market Data scale. The bonds are callable at par in 2023.

The second series of $683.3 million is rated A1 by Moody's and A-plus by Standard & Poor's Fitch. Yields ranged from 2.19% with a 5% coupon in 2019 to 5.11% with a 5% coupon in 2048. Spreads ranged from 60 basis points to 90 basis points above the MMD scale. The bonds are callable at par in 2023.

The third series of $170 billion of capital appreciation bonds are rated A1 by Moody's and A-plus by Standard & Poor's and Fitch. Yields ranged from 6.09% and 6.44% in a split 2039 maturity to 6.21% and 6.56% in a split 2046 maturity. Spreads ranged from 195 basis points to 235 basis points above the MMD scale. Portions of bonds maturing between 2039 and 2046 are callable at par in 2023.

The fourth series of $174.4 million is rated A1 by Moody's and A-plus by Standard & Poor's and Fitch. Yields ranged from 5.65% in 2034 to 5.85% in 2039. Spreads ranged from 167 basis points to 172 basis points above the MMD scale. The bonds are callable at par in 2031.

Barclays released a pre-marketing wire for $206.9 million of Georgia Private Colleges and Universities Authority revenue bonds for Emory University. The bonds are rated Aa2 by Moody's, AA by Standard & Poor's, and AA-plus by Fitch. The bonds are expected to price Tuesday.

Yields ranged from 10 basis points to 30 basis points above the MMD scale on bonds maturing between 2015 and 2022. Bonds maturing in 2043 yielded 50 basis points above the MMD scale. The bonds are callable at par in 2023.

Barclays released a pre-marketing wire for $125.1 million of Orange County Transportation Authority senior lien toll road revenue refunding bonds, rated A1 by Moody's, A by Standard & Poor's, and A-minus by Fitch. The deal is expected to price Tuesday.

Yields ranged from 35 basis points to 90 basis points above the MMD scale on bonds maturing in 2015 and 2030. The bonds are callable at par in 2023.

In the secondary market, trades compiled by data provider Markit showed mostly weakening.

Yields on Tewksbury, Massachusetts, 4s of 2021 and Louisiana 4s of 2031 rose three basis points each to 2.72% and 4.20%, respectively.

Yields on Atlanta airport 5s of 2037 rose three basis points to 5.18% and New Jersey State Turnpike Authority 5s of 2038 rose one basis point to 4.80%.

Other trades were stronger. Yields on Ohio's Buckeye Tobacco Settlement Financing Authority 5.125s of 2024 fell six basis points to 7.40% and New York 5s of 2037 fell one basis point to 4.56%.

Monday, yields on the Municipal Market Data scale ended as much as one basis point lower. The 10-year yield slipped one basis point to 2.69%. The 30-year was steady at 4.21% for the second session and the two-year finished flat at 0.43% for the ninth consecutive session.

Yields on the Municipal Market Advisors scale also ended as much as 1 basis point lower. The 10-year and 30-year yields were steady at 2.89% and 4.29%, respectively. The two-year was steady at 0.54% for the fourth session.

Treasuries weakened Monday. The benchmark 10-year yield increased three basis points to 2.59% and the 30-year yield rose five basis points to 3.66%. The two-year was steady at 0.33%.

While buyers appeared to shy away from buying munis Monday, some firms are adding exposure to municipals.

"We began the quarter with an overweight to undervalued municipals, and we added selectively to our holding as the market cheapened further," wrote Jonathan Lewis, chief investment officer at Samson Capital Advisors in a quarterly research report.

While retail investors withdrew record amounts of money from muni bond mutual funds at cheap levels, Lewis said prices should start to normalize. "As valuations normalize to levels consistent with the high quality and preferential tax treatment of the municipal sector, we believe these holdings will add significant value. At the current ratios and yield relationships, our municipal holdings are making a significant contribution to the superior yield our strategy generates relative to the benchmark. We will likely continue to add to those positions as we expect relationships to normalize."

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