Market Close: Munis Lower As 10-Year Treasury Breaks Above 2%

The tax-exempt market ended lower Wednesday, following Treasuries, as market participants said new deals were relatively well-received and balances from deals on Tuesday moved lower in the secondary.

Muni bond traders added that buyers remain cautious to enter the market at still relatively low yields.

“The market is adjusting to new competitive issues,” said Steve McLaughlin, senior fixed-income portfolio manager at Granite Springs. “Supply is light this week and so it’s mostly interdealer business. But the balances on new deals are moving and getting hit very well.”

Overall, the market feels about one to two basis points weaker, he added. “Everyone is hung up on if it’s one or two basis points lower, but the market doesn’t have much direction due to seasonal factors. The new-issue market is slow and D.C. is still addressing the cap on tax-exemption.”

And with yield so low, buyers remain cautious, McLaughlin said. “When the market is at low nominal yields, you are always cautious. It’s tougher to find value.”

Other traders said the market was cautious in Wednesday trading. “The market is opening quiet out of the gates,” a Chicago trader said. “There are not as many bid-sides floating around but there were a few new issues balances that were cut. The secondary is not really reacting. It’s not carrying over as there aren’t aggressive sellers in the secondary yet.”

Still, the market felt a little weaker and he added that traders are looking to the large competitive deals for direction.

In the primary, JPMorgan priced $289.8 million of San Diego County Water Authority water revenue refunding bonds, rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.

Yields ranged from 1.13% with 3% and 5% coupons in a split 2019 maturity to 2.86% with a 5% coupon in 2034. The bonds are callable at par in 2022.

In the competitive market, Bank of America Merrill Lynch won the bid for $236.5 million of triple-A rated Virginia general obligation bonds.

Yields on the first series of $17 million ranged from 0.25% with a 2% coupon in 2014 to 3.00% with a 3% coupon in 2033. The bonds are callable at par in 2023.

Yields on the second series, $219.5 million of refunding bonds, ranged from 0.53% with a 5% coupon in 2016 to 2.75% with a 3% coupon in 2030. The bonds are callable at par in 2023.

Morgan Stanley won the bid for $212.8 million of Victor Valley Union High School District, Calif., general obligation capital appreciation bonds, rated A-minus by Standard & Poor’s.

The bonds had a yield to maturity of 1.35% in 2015 to 5.90% in 2052. The credits are callable at par in 2023, except those maturing in 2035.

B of A Merrill won the bid for $165 million of Maryland Department of Transportation consolidated transportation bonds, rated Aa1 by Moody’s, AAA by Standard & Poor’s, and AA-plus by Fitch.

Yields ranged from 0.50% with a 4% coupon in 2016 to 2.33% with a 5% coupon in 2028. The bonds are callable at par in 2021 except for credits maturing between 2016 and 2021

In the secondary market, trades compiled by data provider Markit showed mostly weakening.

Yields on Illinois 5.25s of 2020 soared seven basis points to 2.57% while Austin, Texas, 5s of 2022 increased four basis points to 1.90%.

Yields on Chula Vista, Calif., Industrial Development 1.65s of 2018 jumped three basis points to 1.03%, while Connecticut 5s of 2022 rose two basis points to 1.98%. Yields on Washington 4s of 2028 rose one basis point to 2.80%.

Still, other trades were stronger.

Yields on California’s Golden State Tobacco Securitization Corp. 5s of 2033 and Port Authority of New York and New Jersey 3.75s of 2041 fell two basis points each to 5.70% and 3.90%, respectively.

On Wednesday, municipal bond market reads finished weaker for the second session.

The Municipal Market Data triple-A GO scale ended steady as much as four basis points lower. The 10-year yield and the 30-year yield jumped four basis points each to 1.85% and 2.92%, respectively. The two-year was steady at 0.32% for the third session.

The Municipal Market Advisors 5% coupon triple-A benchmark scale ended as much as four basis points lower. The 10-year yield rose three basis points to 1.87% while the 30-year yield increased four basis points to 2.99%. The two-year closed unchanged at 0.35% for the 13th straight session.

Treasuries finished lower Wednesday. The benchmark 10-year yield spiked up five basis points to 2.03% while the 30-year yield jumped four basis points to 3.23%. The two-year yield rose one basis point to 0.29%.

While munis have traded lower over the past few trading sessions, volatility for the most part has left the muni bond market, according to J.R. Rieger, vice president of fixed income at Standard & Poor’s Dow Jones Indices. Munis are also still attractive relative to their corporate counterparts.

“Volatility has left the municipal bond market at least for the time being,” Rieger said. “Munis have been pretty steady so far in 2013.”

Indeed, the S&P National AMT-Free Municipal Bond Index has returned 0.82% for the year to date, with a weighted average yield to worst for bonds in the index at 1.97%. The index also has a taxable equivalent yield of over 3.00%. “Municipal bonds are still incrementally higher yield than their counterparts in the corporate bond market,” Rieger said.



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