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Market Post: Attractive Muni Ratios to Treasuries Lure Buyers

Municipal bond yields, true to their habit of following Treasury yields with a noticeable lag, have started Tuesday lower, bestowing upon the market a stronger tenor.

The 10-year sector of the municipal bond yield curve is pulling in buyers, a trader in New York said. Thanks to a rally in Treasuries, coupled with muni underperformance Monday, 10-year muni ratios to Treasuries climbed to 100% for the first time since the end of December.

"Things are feeling much better; there's a better tone in the market this morning," the trader said. "Munis didn't move yesterday when Treasuries had a nice rally, so ratios got inflated. So, people are jumping into munis right around the 10-year sector. And it sounds like there are some crossover buyers that have come in because rates are attractive versus Treasuries at this point this morning."

Market participants also are eager to see how more of the week's new issuance, due to hit the market Tuesday, will price. This week, $7.80 billion of bonds is expected to reach the primary, almost doubling last week's revised $4.20 billion.

More retail orders are expected to reach the market Tuesday, including the second such order period for $839.1 million of New York City general obligation debt. Morgan Stanley priced the deal, structured in six series for retail Monday.

The city expects to sell all of the bonds to retail over the two-day retail order period. Institutions can clean up anything that remains by Wednesday.

The bonds are rated Aa2 by Moody's Investors Service and AA by Standard & Poor's and Fitch Ratings. Yields for the first series, $500 million, range from 0.61% with a 5.00% coupon in 2016 to 3.561% with a 3.50% coupon in 2038.

Credits maturing in 2015 were offered in a sealed bid; those maturing in 2037 were not available for retail. The bonds are callable at par in 2023.

Yields in a second series, $222.6 million, range from 0.45% with a 2.00% coupon in 2015 to 3.391% with a 3.375% coupon in 2034. Credits maturing in 2014 were offered in a sealed bid.

The bonds are callable at par in 2023. Credits in four series that total $116.4 million were not offered to retail.
The deal received about $147 million in orders on the first day of retail, Alan Schankel, a managing director at Janney Capital Markets, wrote in a research brief.

JPMorgan expects to price $400 million of Houston Community College System Harris and Fort Bend Counties, Texas, limited tax GOs. The bonds are rated Aa1 by Moody's and AA-plus by Standard & Poor's.

Muni yields must have gotten a good night's rest, for they started Tuesday with a firm stride, according to the Municipal Market Data triple-A GO scale. While there was no read for the front end of the curve, yields of credits maturing at four and five years are flat to three basis points lower. And those between six and 13 years are three to six basis points lower. Beyond 13 years, yields have fallen one to four basis points.

At Monday close, the 10-year triple-A skipped down one basis point to 1.89% while the 30-year ended the day at 2.94% for the third straight session. The two-year closed at 0.31% for the fifth session.

Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale ended Monday flat to one basis point lower. The 10-year yield held at 1.90% for the fourth session. The 30-year yield closed at 3.02% for the third session. The two-year slipped one basis point to 0.34%.

Treasuries started Tuesday steady across the curve. The benchmark 10-year yield remained at 1.89%. The 30-year yield held at 3.08%. The two-year yield remained unchanged at 0.25%.

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