Tax-exempts ended weaker Wednesday as the market sifted through several large primary deals.
Supply headwinds, coupled with dissenting views from the Fed on how much longer to continue quantitative easing, pushed bonds lower. Still, traders said the weakness in the market should not be confused with a full-on selloff.
“The market struggles, but the wind picks up and it moves ahead quickly,” a Chicago trader said. “So we are struggling to get back, but we will catch a little wind because the macro winds are pro bonds. The economy is not in good shape so the macro picture is not higher interest rates.”
He added that the muni market is driven by supply and demand. “There is not a lot of supply,” he said. “And Treasuries are better today.”
“If you have something that’s a little different and off the beaten path with some extra spread, you can sell and trade it. There are customers looking for income, capital preservation and it doesn’t necessarily need to be the gold standard that a high-grade bond offers.”
Others agreed the market was quiet until new primary deals could energize the market. “It’s still kind of quiet,” a New York trader said. “There are new issues going on.” He added the market is looking at the North Carolina general obligation bonds pricing in the competitive market to provide direction for the secondary.
In the primary market, Barclays priced $435 million of New York City Municipal Water Finance Authority water and sewer second general resolution revenue bonds following a retail order period Tuesday. The bonds are rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s.
The bonds yielded 3.855% with a 3.75% coupon, 3.75% with a 4% coupon, and 3.50% with a 5% coupon in a split 2047 maturity. Yields were increased 10 basis points from retail pricing Tuesday.
Bank of America Merrill Lynch priced $149.5 million of Georgia Housing and Finance Authority single family mortgage bonds, rated AAA by Standard & Poor’s.
The bonds were priced at par to yield from 0.20% in 2013 to 3.90% in 2043. The bonds are callable at par in 2022.
Bank of America Merrill Lynch priced for institutions $115 million of triple-A rated Delaware general obligation refunding bonds following a retail order period Tuesday.
Yields ranged from 0.67% with 3% and 4% coupons in a split 2017 maturity to 2.49% with a 3% coupon in 2026. The bonds are callable at par in 2023. Yields were increased as much as seven basis points across the curve from retail pricing.
In the competitive market, triple-A rated North Carolina auctioned $702 million of GOs in two pricings.
Bank of America Merrill Lynch won the bid for $352 million. Yields ranged from 0.34% with a 3.5% coupon in 2015 to 2.34% with a 5% coupon in 2026.
US Bancorp won the bid for $350 million. Yields ranged from 0.40% with a 3% coupon in 2015 to 1.96% with a 4% coupon in 2023.
“They sold most of the deal,” a New York trader said. “But it came in cheap. Really cheap.” Indeed, bonds bought by B of A Merrill with a 5% coupon maturing in 2024 yielded 17 basis points above the MMD scale while bonds maturing in 2025 with a 5% coupon yielded 20 basis points above the MMD scale. Credits maturing in 2026 with a 5% coupon yielded 23 basis points above the comparable MMD yield.
Wells Fargo Securities won the bid for $490 million of Santa Clara County, Calif., GOs, rated AA-plus by Standard & Poor’s and Fitch Ratings. Pricing details were not available by press time.
Municipal bond market scales finished weaker Wednesday.
Yields on the Municipal Market Data triple-A GO scale jumped across the curve. The 10-year yield increased five basis points to 1.90% while the 30-year yield rose four basis points to 2.92%. The two-year was steady at 0.31% for the second session.
The Municipal Market Advisors 5% coupon triple-A benchmark scale ended weaker. The 10-year yield jumped three basis points to 1.90% while the 30-year yield rose four basis points to 3.03%. The two-year closed unchanged at 0.35% for the 17th session.
Treasuries had a choppy session with strong trading in the morning, then weaker trading after the release of the Federal Open Market Committee minutes. By the end of the day, Treasuries ended firmer again. The benchmark 10-year yield and the 30-year yield fell one basis point each to 2.02% and 3.20%, respectively. The two-year yield also fell one basis point to 0.27%.
In economic news, the FOMC released minutes from its January meeting, showing more members are becoming increasingly nervous about the effects of new asset purchases.
“Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability,” the minutes state. “Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.”
The Fed is currently buying $40 billion a month of mortgage-backed securities and $45 billion a month of longer-term Treasury securities.