Market Close: Munis End Firmer In Cautious Rally

The tax-exempt market ended three basis points stronger Tuesday as the week’s largest deals, including Texas and California, priced. Still, traders expressed doubts about the firmer tone and said it was unlikely to last.

“The market seems to feel better, but what’s disconcerting is $21 billion exiting muni-only funds,” a Texas trader said, referring to the net outflows in the past 25 weeks, as reported by Lipper FMI. “It’s controlled selling. And retail is still a net seller at least on the fund side.

“Individual retail buyers in the 25 to 50 bonds have been absent for a while. I’m sure it’s the stock market and Detroit and headline events and it feels like death by 1,000 cuts,” he said.

Other traders agreed the market felt stronger Tuesday, but outflows continue to plague the market, making any rally short-lived.

“The market is looking OK,” a Los Angeles trader said. “Treasuries are slightly up and Monday was an improvement.”

Still, last week municipal bond mutual funds posted the largest outflows of August and that continued to put selling pressure in the secondary market. Bid lists surfaced again Tuesday morning. “That’s not pushing the market lower,” the Los Angeles trader said.

The biggest deals of the week priced in the competitive market Tuesday. Texas successfully auctioned $7.2 billion of tax and revenue anticipation notes with a 2% coupon, rated MIG-1 by Moody’s Investors Service and F-1-plus by Fitch Ratings.

JPMorgan won $4.8 billion of the TRANs in three series, including $2.5 billion which yielded 0.203%, $2.05 billion which yielded 0.205%, and $250 million which yielded 0.196%.

Wells Fargo Securities won the bid for $1 billion, including $400 million which yielded 0.197% , $300 million which yielded 0.192% , $200 million which yielded 0.187%, and $100 million which yielded 0.182%.

Morgan Stanley won the bid for $500 million which yielded 0.196%.

Goldman, Sachs & Co. won the bid for $375 million, including $200 million which yielded 0.204%, $100 million which yielded 0.20%, and $75 million which yielded 0.204%.

Bank of America Merrill Lynch won the bid for $260 million, including $150 million which yielded 0.20% and $110 million which yielded 0.19%.

RBC Capital Markets won the bid for $215 million which yielded 0.184%.

Citi won the bid for $50 million which yielded 0.196%.

“Historically Texas comes and goes,” the Texas trader said. “There is always such big demand for it. Sometimes it hangs around but usually someone stocks some bonds and within a week it’s gone.”

Generally speaking, this trader said there is so much cash on the sidelines that high-quality, short-term paper is very expensive. “For quality paper it’s impossible to buy anything with a reasonable spread on it. It’s crazy high levels.”

In other big primary deals, California auctioned $764.1 million of general obligation bonds in two pricings, $249.2 million and $514.9 million, rated A1 by Moody’s and A by Standard & Poor’s and Fitch.

JPMorgan won the bid for $514.9 million, achieving a true interest cost of 4.630% and beating out seven other underwriters, according to a spokesman for the California State Treasurer. After JPMorgan, the four lowest bids were B of A Merrill at 4.654%, Morgan Stanley at 4.670%, Citi at 4.691%, and Goldman at 4.694%.

Citi won the bid for $249.2 million with a true interest cost of 2.910%, beating out eight other underwriters. After Citi, the next four lowest bids were RBC at 2.914%, Wells Fargo at 2.916%, Morgan Stanley at 2.938%, and JPMorgan at 2.950%.

In the negotiated market, some of the week largest deals also priced.

Wells Fargo priced $220.7 million of Maine Municipal Bond Bank taxable liquor operation revenue bonds, rated A1 by Moody’s and A-plus by Standard & Poor’s. The bonds were priced at par to yield from 1.068% in 2015 to 4.352% in 2024. Spreads ranged from 70 basis points to 160 basis points over the comparable Treasury yield.

Tuesday, yields on the triple-A Municipal Market Data scale ended as much as four basis points firmer. The 10-year yield fell three basis points to 2.93% and the 30-year yield slid two basis points to 4.43%. The two-year finished flat at 0.43% for the 30th straight session.

Yields on the Municipal Market Advisors scale ended as much as three basis points lower. The 10-year and 30-year yields fell two basis points each to 3.08% and 4.53%, respectively. The two-year was flat at 0.55% for the ninth session.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER