Market Close: Munis End Softer with Eyes on NYC Water

The New York City Municipal Water Finance Authority kicked off this week with a retail pricing Monday that looked expensive in the midst of an overall softer market.

Ramirez & Co. priced for retail $519.6 million of the NYC water and sewer system second general resolution revenue bonds, rated Aa2 by Moody's Investors Service and AA-plus by Standard & Poor's and Fitch Ratings. Institutional pricing is expected Tuesday.

Yields ranged from 3.257% with a 3.125% coupon in 2027 to 3.858% with a 4% coupon in 2038. The bonds are callable at par in 2023. Portions of bonds maturing in 2034, 2035, and 2038 were not offered for retail.

"All eyes are on NYC Water," a New Jersey trader said. "The shorter maturities look OK on the 2027 to 2034 maturities. But the 4% coupons are pricey compared to the water bonds trading in the secondary."

He added that 4s of 2047 had a bid of 3.95% in the secondary Monday, 83 basis points over the Municipal Market Data scale. In the primary Monday, 4s of 2035 yielded 3.58%, or only 75 basis points over the scale. "Those should probably be trading in the 85-basis-point range, so they are going to have to cut tomorrow."

This trader continued that the 3% coupons look better.

Other traders agreed all eyes were on the primary this week. "People are still focused on the primary but with some stability on the Treasury side there's no panic," a Chicago trader said.

Outside that primary deal, the rest of the market had a better tone than Friday, though it still felt weaker.

"It's feeling better than Friday," the Chicago trader said. "There are actually some bid sides for paper."

The New Jersey trader described the market as "sloppy," noting that,"it was opening up slow and felt like a typical Monday after a weekend with the clocks moving and everyone looks groggy. What's left over from the primary market last week is trading down a quarter to half a point in the secondary market. But supply feels heavier and there's not much of a bid side."

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

Yields on Houston Utilities System 5s of 2033 soared seven basis points to 2.92% while California 5s of 2017 increased one basis point to 0.70%.

Yields on Connecticut 5s of 2021 and Harris County, Texas, Flood Control District 4.75s of 2029 rose two basis points each to 1.94% and 1.60%, respectively.

Still, other trades were stronger. Yields on Harrisonburg, Va., Industrial Development Authority 4.5s of 2036 fell two basis points to 2.62% while New Jersey Tobacco Settlement Financing Corp. 4.5s of 2023 dropped one basis point to 4.56%.

On Monday, municipal bond market scales ended weaker after posting losses for five consecutive trading sessions last week.

Yields on the Municipal Market Data triple-A GO scale ended as much as two basis points higher. The 10-year yield and 30-year yield closed flat at 1.99% and 3.08%, respectively, for the second consecutive session. The two-year closed at 0.31% for the 15th straight session.

Since the beginning of March, the 10-year MMD yield has jumped 16 basis points from 1.78% on March 1. The 30-year yield has soared 18 basis points from 2.90% at the beginning of the month.

On Monday, yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale closed as much as two basis points higher. The 10-year yield and the 30-year yield rose one basis point each to 2.00% and 3.16%, respectively. The two-year was steady at 0.33% for the 10th session.

Since the beginning of March, the 10-year yield spiked up 18 basis points from where it started the month at 1.82%. The 30-year yield also jumped up 18 basis points from 2.98% on March 1.

Treasuries closed steady to slightly firmer Monday. The two-year and 30-year yields fell one basis point each to 0.26% and 3.25%, respectively. The benchmark 10-year yield was steady at 2.06%.

Since March 1, performance of munis relative to Treasuries has been mixed. Muni to Treasury yield ratios fell on the short end as munis outperformed Treasuries and became relatively more expensive. The five-year ratio dropped to 91.1% on Monday from 101.3% at the beginning of the month.

But ratios in the belly and long end of the curve were mostly flat. The 10-year ratio rose just slightly to 96.6% from 96.2% at the beginning of the month. The 30-year ratio was flat at 94.8%.

From the beginning of the year, performance looks the same with munis outperforming on the short end. The five-year muni yield to Treasury yield ratio dropped to 91.1% from 110.5% on Jan. 2.

But in the belly of the curve, ratios were mostly flat. The 10-year ratio came in at 96.6%, above even from 96.7% at the beginning of the year. The 30-year ratio rose just slightly to 94.8% on Monday from 93.8% at the beginning of the year.

While there has been outperformance on the short end relative to Treasuries, many market participants are bearish on the next few months and the arrival of tax season.

"We are beginning to wrestle with tax-related retail selling: a likely driver of early reads on fund outflows," wrote analysts at MMA. "Low nominal yields could amplify tax selling."

They added that while most selling has come from the retail end, more institutional sized blocks could surface. "We assume that as the month progresses, more institutional-sized selling will occur, driving incremental weakness in tax-exempts and pushing ratios every closer to 100%."

Others agreed. "As we move into the heart of tax season, muni investors have become more concerned about the weakening of fund flows as holders sell to fund tax payments," wrote analysts at Barclays, adding that over the past 20 years, fund flows have slowed from 0.9% of assets in February on average to 0.4% in March and 0.2% in April.

"However, this has not typically led to a meaningful rise in muni ratios," they added. "The exceptions are when fund flows are negative, and even then, other factors such as supply have played an important role." They continued that fund flows usually rebound mid-year and peak in September.

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