The tax-exempt market ended firmer Wednesday following two trading sessions of steady-to-rising yields, as a stronger Treasury market and underwhelming new issue supply provided support for the market.
On the second day of a government shutdown and with the debt ceiling debate approaching in the next few weeks, traders were cautious about the direction of the market until any resolution is reached.
"It's one of those things where stocks rallied Tuesday in the face of the shutdown but now they're down because of it," a Chicago trader said. "On Tuesday, we completely shrugged it off. I think we'll just stick around trading even until something shakes out."
Other traders were more positive, noting taxes are higher, which increases the value of tax-exempt bonds, outflows from muni bond funds have slowed, and supply remains at manageable levels. Its niche buyer base also insulates the municipal bond market from the broader headlines.
"The muni market is so supply-and-demand oriented that all we needed was a slowdown in redemptions," a Boston trader said. "At these rate levels a lot of projects can't come to market right now, so supply won't be a big deal for the rest of the year. All of a sudden there was a bid in the high-yield market last week just because you had positive flows into muni bond funds."
This trader added that the sellers who wanted to get out of Detroit and Puerto Rico credits have done so by now. "So we are seeing pretty stable price levels based on the risk and reward assessment. We've hit the lows on most Detroit bonds."
While investors are concerned about the debt ceiling debate ramping up, most traders doubt the U.S. will default on its debt. Still, the uncertainty could give a push for safety assets. "There's not a chance we are going to default, but that doesn't mean people won't get very afraid to do something," this trader said. "The uncertainty will drive the flight to safe, quality, liquid assets and in a predictable world, you'd see somewhat of a repeat of last time." In July 2011, a debt ceiling debate and subsequent downgrade of the U.S. debt rating from AAA by Standard & Poor's led to a rush to buy Treasuries.
In the primary market, JPMorgan held preliminary pricing for $898.5 million of Chicago O'Hare International Airport bonds, rated A2 by Moody's Investors Service and A-minus by Standard & Poor's and Fitch Ratings.
Yields on the first series, $334.7 million of general airport senior lien revenue refunding bonds subject to the alternative minimum tax, ranged from 1.05% with a 5% coupon in 2016 to 4.43% with a 5% coupon in 2026. Bonds maturing in 2014 and 2015 were offered via sealed bid. The bonds are callable at par in 2023.
Yields on the second series, $168.1 million of non-AMT bonds, ranged from 0.85% with a 4% coupon in 2016 to 4.56% with a 5.25% coupon in 2029. Bonds maturing in 2014 and 2015 were offered via sealed bid. The bonds are callable at par in 2023.
Yields on the third series, $99.5 million of general airport senior lien revenue bonds subject to the AMT, ranged from 1.54% with a 4% coupon in 2017 to 5.57% with a 5.5% coupon in 2044. The bonds are callable at par in 2023.
Yields on the fourth series, $296.2 million of non-AMT bonds, ranged from 1.29% with a 3% and a 5% coupon in 2017 to 5.22% with a 5% coupon in 2044. The bonds are callable at par in 2023.
Ramirez & Co. priced for retail $575 million of Connecticut general obligation bonds, rated Aa3 by Moody's Investors Service and AA by Standard & Poor's, Fitch Ratings and Kroll Bond Ratings. Institutional pricing is expected Thursday.
Yields ranged from 0.73% with 3% and 4% coupons in a split 2016 maturity to 3.52% with a 5% coupon in 2027. Bonds maturing in 2015 were offered via sealed bid. The bonds are callable at par in 2023.
Siebert Brandford Shank & Co. priced for institutions $459.8 million of California State Public Works Board lease revenue bonds, following a retail order period Tuesday. The deal includes two series for correctional facilities projects rated A2 by Moody's and A-minus by Standard & Poor's and Fitch, as well as one series for various projects at the California State University rated Aa3 by Moody's and A-minus by Standard & Poor's and Fitch.
Yields on the first series of $136.3 million ranged from 0.50% with a 1% coupon in 2015 to 4.70% with a 4.625% coupon in 2033. Bonds maturing in 2014 were offered via sealed bid. The bonds are callable at par in 2023. Yields were lowered one to four basis points on bonds maturing between 2015 and 2018 and raised two basis points on select maturities beyond 2020 from retail pricing.
Yields on the second series of $161.1 million ranged from 0.50% with a 5% coupon in 2015 to 4.55% with a 5.25% coupon in 2033. Bonds maturing in 2014 were offered via sealed bid and all are callable at par in 2023. Yields were lowered one to four basis points from retail pricing on bonds maturing between 2015 and 2018 and raised one to two basis points on bonds maturing between 2020 and 2025.
Yields on the third series of $162.4 million ranged from 0.76% with a 5% coupon in 2016 to 4.83% with a 5% coupon in 2038. The bonds are callable at par in 2023. Yields were lowered one to four basis points from retail pricing on bonds maturing between 2016 and 2019 and raised one and two basis points on bonds maturing between 2020 and 2025.
In the secondary market, trades compiled by data provider Markit showed strengthening. Yields on Alabama 21st Century Authority 4s of 2015 slid seven basis points to 0.73% and Florida's Jacksonville Electric Authority 4s of 2037 fell four basis points to 4.81%.
On Wednesday, yields on the triple-A Municipal Market Data scale ended as much as two basis points lower. The 10-year yield slid two basis points to 2.54% and the 30-year yield fell one basis point to 4.11%. The two-year was steady at 0.37%.
Yields on the Municipal Market Advisors scale also ended as much as two basis points lower. The 10-year yield fell two basis points to 2.69% and the 30-year yield dropped one basis point to 4.26%. The two-year was steady at 0.54% for the 10th consecutive trading session.
Treasuries were stronger Wednesday on worse-than-expected economic data concerns over the government shutdown and debt ceiling. The benchmark 10-year yield slid three basis points to 2.62%. The two-year and 30-year yields fell one basis point each to 0.33% and 3.71%, respectively.
