Municipal bonds on Wednesday showed signs of running out of the steam that pushed yields lower earlier in the week.
“It seems quietly firm,” one trader said in an interview from Chicago. “There’s random sellers, but you’re not really getting a whole lot of two way flow on the street. Seems like we’re going to limp right into the new year.”
Rallying municipals on Monday and Tuesday seemed to indicate that traders no longer fear the Federal Reserve slowing down its bond buyback program. That rally slowed today, with yields across the curve unchanged or slightly firmer, traders said, even as new large deals were readily taken up by buyers.
Total volume for the week is expected to reach $11.33 billion, up from $6.23 billion last week, Ipreo, The Bond Buyer and Thomson Reuters numbers show.
That includes a $1.6 billion Goldman, Sachs & Co.-led utility debt securitization tax-exempt bond issue for the Long Island Power Authority, a deal on which many traders were focused Wednesday. The bonds are rated Aaa by Moody’s and AAA by Standard & Poor’s and Fitch.
Citigroup Global Markets also brought $1.6 billion of New York thruway authority junior indebtedness obligations for retail pricing Wednesday. The bonds were rated A3 by Moody’s, and A-minus by S&P.
“Trading began the session in fairly muted fashion but has picked up into mid-day driven mainly by activity in revenue bonds,” according to Interactive Data’s daily market insight. “A couple large New York Agency deals are dominating investor attention in the primary market.”
The Citi-led thruway deal had over 500 million in orders, the Chicago-based trader said. Most of the new issue deals are priced cheaply and are going out the door quick, he said.
“They’re pricing them cheap and you’ve seen a lot of bids wanted,” the trader said. “With the more odds and ends deals, there’s plenty of cash on hand but no urgency to use it at all.”
General obligation and revenue bonds had yields fall as much as five basis points, with stronger bids observed in intermediate maturities, according to Interactive Data. Yields on Puerto Rico GOs and revenue bonds climbed anywhere from five to 15 basis points.
Yields on the Goldman-led debt securitization bonds ranged from 0.41% with a 5% coupon maturing in 2016 to 4.52% with a 5% coupon in 2041. The bonds are callable at par in 2023.
Yields on Citi-led New York thruway bonds for retail orders had yields ranging from 2.33% with a 3% coupon maturing in 2019 to 2.33% with a 5% coupon maturing in 2019. The bonds do not feature an optional call.
“From seven years and in on the curve, there’s just so much cash, so people are gobbling up all the products that come,” the trader said. “You still have some interest in the long bonds, just a little more selectively.”
Yields on the Municipal Market Data triple-A scale Tuesday showed bonds with maturities between 2014 and 2043 were unchanged.
“I think we’re going to wallow around where we are until we get into the new year and the Federal Reserve does whatever they’re going to do with tapering,” a trader on the west coast said in an interview. “Treasuries are off a little bit and munis are mostly unchanged.”
The benchmark 10-year and 30-year Treasury yields softened by three basis points to 2.85% and 3.85%, respectively. The two-year treasury yield jumped one basis point to 0.31%.
The trader, who deals in the secondary market, said overall the market was better than he would expect given recent economic data. Participants in the primary market agreed.
“After Friday’s economic data, you’d think the government market would’ve gotten crushed, but we’re seeing nice flow today,” one New York-based trader said Wednesday morning. “We’re definitely seeing some buyer interest, seeing some flows, and there’s still a lot of money out there.”
The Bureau of Labor Statistics on Friday said the unemployment rate fell to 7.0%, or 0.25 percentage point less than October’s number. The bureau also reported that the U.S. November employment picture was stronger than economists expected.
“A lot of the secondary stuff is getting some good pricing,” the west coast trader said. “We’re seeing some stuff out for the bid, seems to be getting some pretty decent prices, better than we would have expected.”
Interactive Data also labeled the secondary marketplace as positive in some places, with yields generally a few basis points lower.
“What’s particularly notable about the last few days’ trading action is that the gains are coming amid greater expectations the Fed could slightly reduce bond purchases at its December meeting,” Janney said in its report. “While it’s our belief that a December taper is unlikely, the solid November payrolls number did undeniably raise the odds. Regardless, it appears the interest rate market is no longer tentative about the taper.”
Another New York-based trader said new deals were highly anticipated but activity remained fairly flat early in the morning. Some participants may have been selling ahead of a Treasury Department auction of $21 billion 9-year, 11-month 2¾% notes today, he said.
“If you have treasury supply coming into the market they’ll try to cheapen the market before they bid on the auction,” the trader said. “Treasuries are a bellwether for interest rates, if you have an auction and a large supply in the market, it impacts it negatively as people try to sell off.”
The biggest deal of the week will be $1.7 billion California eastern transportation refunding revenue bonds. The Barclays-led deal is set to price Thursday, with a rating of Ba1 by Moody’s and BBB-minus from S&P and Fitch.
