Municipal bonds trailed Treasuries’ rally Thursday after the end of the government standoff as cash-heavy investors anticipated calmer waters and a surge in volume.
“We thought we’d see some action in the market but there’s a lot of supply on the horizon, so I think investors are content to let things sit,” a trader in San Francisco said, as tax-exempt yields slipped a few basis points, but lagged behind those of Treasuries. “We’re not really rallying. The Treasury market is rallying; we’re really underperforming what’s going on there. We’ve just stabilized. It seems we’re going to see these new levels. We’re going to see spreads widen.”
Retail activity, measured through trade counts, increased over the past two sessions, according to a trader in Texas. The market has started to stabilize in the face of appealing levels, he said.
“The market looks a little stronger here,” the trader said. “Deals are little bit stronger, maybe up to three basis points. It’s cash that’s accumulating, and tax-exempt yields are still pretty attractive compared to taxable.”
The market anticipates more issuance in the coming week. The Bond Buyer’s most recent 30-day visible supply showed $9.82 billion expected to arrive.
Large deals have started to line up, including competitive and negotiated general obligation offerings from Pennsylvania, Minnesota and California, as well as credits from the New York City Transitional Finance Authority.
And that means the market should see refunding activity pick up, which indicates the calendar could grow more than expected, the trader in Texas said.
In addition, the economy received a last-minute reprieve from a potential financial disaster after Congress approved a spending measure late Wednesday which the president quickly signed. The agreement ended the political standoff between Democrats and Republicans, returned federal employees to their jobs for the first time this month and ensured the federal government would not default on its debt obligations, at least until the early part of next year.
This provides a degree of calm for fixed income markets, munis included, a trader in New York said.
“When the dust settles in Washington, people come out thinking Treasuries aren’t the worst place to park your money, and munis, at these percentages, are relatively attractive again,” he said. “Long ratios are probably 115%. The last time you saw crossover buying was around 118%.”
Most of this week’s largest deals already came to market. Still, Barclays priced $188 million of Lower Colorado River Authority revenue refunding bonds. They are rated A1 by Moody’s Investors Service and A by both Standard & Poor’s and Fitch Ratings.
Yields range from 0.61% with a 4.00% coupon in 2015 to 5.15% with a 5.00% coupon in 2039. The bonds are callable at par in 2023.
And Bank of America Merrill Lynch came to market with $101.9 million of Virginia Housing Development Authority taxable mortgage bonds with a pass-through structure. They were rated triple-A by both Moody’s and Standard & Poor’s, and yielded 4.25% priced at par in 2043.
By the day’s close, yields fell most for maturities between 11 and 14 years and past 20 years, according to one market gauge. Traders said that muni yields were at most around three basis points lower.
In the secondary market, trades compiled by data provider Markit showed mostly strengthening. Yields on Connecticut GOs 5s of 2022 fell four basis points to 2.68%.
Yields on New York City TFA 5s of 2028 and South Carolina Public Service Authority 5s of 2048 dipped two basis points each to 2.95% and 5.17%, respectively. Yields on Puerto Rico Commonwealth Highway and Transportation Authority 5.25s of 2039 increased two basis points to 8.53%.
Puerto Rico bond bids continue to see
Trades on the Municipal Securities Rulemaking Board’s EMMA site of Sales Tax Financing Corp., or COFINA, bonds showed lower yields on intraday trading. One customer bought a block size trade of COFINA 5.75s of 2037 bonds at 7.95%, lower than 8.58% on Wednesday.
Puerto Rico bonds, overall, saw bids up to 20 basis points stronger Thursday, Interactive Data reported in a research brief. The commonwealth’s GO bond yields hit multi-week lows after officials indicated that they may not issue GO debt until the middle of 2014.
“Puerto Rico paper has rallied about 20-to-25 basis points today,” the San Francisco trader said. “And that’s maybe a result of some of the crossover hedge fund guys coming in and buying right now.”
Tax-exempt yields on the triple-A Municipal Market Data scale closed the day’s session as much as four basis points lower beyond four years.
On Thursday, The 10-year yield fell three basis points to 2.62%. The 30-year decreased four basis points to 4.22%. The two-year held steady at 0.35% for the fifth straight session.
Yields on the Municipal Market Advisors benchmark scale closed the day as much as four basis points lower. The 10-year yield fell two basis points to 2.76% while the 30-year yield tumbled four basis points to 4.35%. The two-year held at 0.55% for the seventh consecutive session.
Treasury yields outpaced munis, on largely in reaction to the U.S. government’s newfound temporary solution to the debt ceiling crisis.
The benchmark 10-year yield fell eight basis points to 2.59%. The 30-year yield dropped six basis points to 3.67%. The two-year yield ticked down one basis point to 0.33%.
