Market Close: Muni Market Firms as New Deals Overshadow Detroit

The municipal market stayed steady Tuesday as traders prepared for the week’s biggest deals, set to price Wednesday and Thursday, and shrugged off a federal judge’s decision to grant Detroit bankruptcy protection.

“It’s quiet but it’s firm,” a California-based trader said in an interview. “The long end of the curve is getting attention because it’s sort of thin there,” he said, referring to the lack of supply of bonds with the longest maturities. “The front end almost seems to be cash equivalent, with plenty of demand for higher quality paper through ten years.”

Michigan bonds were unchanged as of early Tuesday afternoon even after the decision that Detroit would be eligible for protection as it seeks to restructure an estimated $18 billion of debt.

“Detroit paper is up in the air right now,” one trader said.

Volume for Michigan paper was up 35% from yesterday, a New York-based trader said. The jump didn’t seem to reflect any interest in the bonds after the decision, though, he said, as there were no major trades evident.

“The fact that they can stay in bankruptcy sort of homogenizes payment, and some people will breathe a sigh of relief,” the California trader said. “It buys them a little bit more time to see what the city comes up with in the next few weeks in terms of some sort of equitable plan.”

Retail trading was sparse on the west coast, the trader said, but with clear demand for higher grade names such as California general obligation bonds.

“Something vanilla with yields between 4.5% and 5% - you’re going to get some action on that,” he said. “The retail demand is clearly there.”

Yields firmed on the long end of the curve, a New York-based trader said. Traders agreed that the market remained quiet ahead of a $1.2 billion Citi-led New York Tobacco Settlement Financing Corporation deal set to price Wednesday.

“If you place something in the negotiated market, it’s going to blow up with lots of demand right now,” the New York-based trader said. “You might have some big funds that are interested in that [tobacco] deal.”

Volume this week is expected to be larger than the week of Thanksgiving, with potential volume totaling $6.55 billion, up from sales of $652.2 million last week, according to Ipreo, The Bond Buyer and Thomson Reuters numbers.

“That tobacco deal is what everyone’s waiting for,” another New York-based trader said. “The rates look interesting with some kickers and short calls.”

Citi’s tobacco settlement deal is large with enough variation yield to attract many municipal investors, but it won’t be the deal some traders look at, the California-based trader said.

“Sin doesn’t always sell,” he said. “Some people just don’t want to be involved in munis and tobacco, so that shouldn’t be a barometer.”

Another Citi-led deal, $134.4 million of Dekalb County, Ga., water and sewerage revenue refunding bonds, were priced for institutions on Tuesday. The bonds are rated Aa3 by Moody’s, A-plus by Standard & Poor’s and AA-minus by Fitch.

Yields ranged from 0.46% with a 3% coupon in 2015 to 4.56% with a 5% coupon in 2035. Bonds maturing in 2014 were offered in a sealed bid. All the bonds are callable at par in 2023.

Many investors considered the Dekalb deal high-grade and the bonds were met favorably by the municipal market, the California trader said.

“The bulk of our inquiries are for the higher-grade stuff,” the trader said. “Our retail team in new york says inquiries within 10 years are the strongest. With concern of rising rates, that doesn’t surprise me, as people stay a little closer to shore.”

Traders agreed that demand for high-quality municipal bonds is present, though buying activity in the coming month is likely to remain low as bond buyers exit positions before the end of the year. A small end-of-year selloff sometimes occurs, one trader pointed out.

“As we go into year-end things are quieting down a little bit,” a New York-based trader said in an interview. “We’re a little bit firmer on the long end of the yield curve but it’s still extremely quiet.”

Retail investors may be pulling their purse strings as the holiday season nears, the trader pointed out. With little retail available in the market, new deals expected to price this week will offer something to investors who plan to remain active through the end of the year, the trader said.

“What ends up happening is people need to move things, and we get this little selloff which is sometimes, because it poses itself for a good buying environment,” the trader said. “Fund managers may just not want to carry something in the new year, so they cut a loss or a stale deal they don’t want to hold through vacation.”

Yields on the Municipal Market Data benchmark triple-A scale were mostly steady. Bonds maturing from 2014 to 2022 and 2028 to 2043 were unchanged. Yields on bonds maturing between 2023 and 2027 jumped a basis point.

Yields on the Municipal Market Advisors benchmark scale ended as much as two basis points firmer. The 10-year yield fell one basis point to 2.71% and the 30-year yield dropped two basis points to 4.34%. The two-year was steady for the second session at 0.37%.

Treasuries were stronger past the front end of the yield curve. The benchmark 10-year yield rose one basis point to 2.79%. The two-year was unchanged at 0.29%, while the 30-year rose one basis point to 3.85%.

Trades compiled by data provider Markit showed bond performance was mixed.

Yields on Buckeye Ohio Tobacco Settlement financing authority 5.75s of 2034 rose four basis points to 8.35% and Evansville, Indiana 4.125s of 2031 gained two basis points to 4.33%.

Yields on California State various purpose general obligation 5s of 2038 slid three basis points to 4.68% and New York MTA transportation revenue 5s of 2023 slipped a basis point to 3.53%.

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