Market Close: Mixed Market Sees Demand Wane

After a rally in the municipal bond market stemming mostly from woes in Cyprus, tax-exempts started to cool off Thursday in what traders described as a mixed session.

While most deals in the primary market bumped prices in institutional order periods, New York's Metropolitan Transportation Authority deal raised yields as much as six basis points on the long end.

Barclays priced for institutions $500 million of MTA transportation revenue bonds, rated A2 by Moody's Investors Service and A by Standard & Poor's and Fitch Ratings. Yields ranged from 0.20% with a 1% coupon in 2013 to 4.10% with a 4% coupon and 3.87% with a 5% coupon in a split 2043 maturity. The bonds are callable at par in 2023 except for those bonds maturing between 2018 and 2028, which are callable at par in 2018.

Outside the MTA deal, the market traded stronger. "There is a firmer tone," a New York trader said. "The New Jersey Turnpike Authority deal was done well and since yesterday we've seen those issues actually be able to improve pricing and we're seeing good flow in that today. That's a good sign and we're seeing a firm, steady tone today."

A second New York trader agreed, but noted that by afternoon, sellers re-entered the market. "The New Jersey Turnpike Authority bonds freed up today to trade and they are trading up a few basis points," the trader said.

And while New Jersey showed gains, the rest of the market started to cool off by afternoon. "The market feels mushy," he said. "It was feeling up, but people are still hitting bids."

Throughout the week, traders said demand was driven by Europe fears. "Cyprus is the biggest driver because nothing has changed in our markets," the first New York trader said. "There is money there in funds and some larger institutions but there is a concern that rates are going to creep up so people have been gun shy. And with the large amount of supply, there should have been adjustments in prices."

But firmer Treasuries are keeping the market strong, he said., and that makes ratios between munis and Treasuries more attractive. "Some are now over 100% and particularly in the 10-year range," the trader said. "That alignment helped the muni market."

In the rest of the primary market, JPMorgan priced $437.3 million of Harris County, Texas, Cultural Education Facilities Finance Corp. hospital revenue refunding bonds for the Memorial Hermann Health System. The bonds are rated A1 by Moody's and A-plus by Standard & Poor's.

Yields on the first series of $315.2 million ranged from 0.56% with a 3% coupon in 2015 to 4.17% with a 4% coupon and 3.85% with a 5% coupon in a split 2035 maturity. The bonds are callable at par in 2022.

The second series, $122.1 million of floating rates, were priced at par between 2014 and 2024. Spreads ranged from 20 basis points to 105 basis points above the SIFMA index.

In the secondary market, trades compiled by data provider Markit showed a mix of strengthening and weakening.

Yields on New Jersey's Tobacco Settlement Financing Corp. 5s of 2041 dropped four basis points to 5.75% while Killeen, Texas, waterworks and sewer 5s of 2033 fell one basis point to 3.24%.

Yields on University of Virginia 5s of 2037 and Washington 5s of 2027 fell two basis points each to 2.99% and 1.74%, respectively.

Other trades were weaker. Yields on Indiana State Finance Authority 5s of 2042 jumped two basis points to 3.85% while Clark County, Nev., 5s of 2016 rose one basis point to 0.72%.

Yields on Alaska 5s of 2015 and Apache County, Ariz., Industrial Development Authority 4.5s of 2030 rose one basis point each to 0.38% and 4.00%, respectively.

On Thursday, municipal bond market scales ended weaker for a second straight session.

Yields on the MMD triple-A GO scale ended steady. The 10-year yield and 30-year yield were flat at 1.95% and 3.10%, respectively. The two-year finished flat at 0.31% for the 23rd consecutive session.

Overall for the week, the 10-year yield fell five basis points from 2.00% last Friday while the 30-year yield dropped four basis points from 3.14% at the end of last week.

Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale also ended as much as one basis point higher. The 10-year yield was steady at 2.01% for the second session while the 30-year yield rose one basis point to 3.20%. The two-year held at 0.33% for the 18th session.

Overall for the week, the 10-year MMA yield finished two basis points lower from 2.03% last week while the 30-year yield also finished two basis points lower from 3.22% last Friday.

Treasuries were mostly stronger Thursday. The benchmark 10-year yield fell two basis points to 1.93% while the 30-year yield dropped four basis points to 3.15%. The two-year yield rose one basis point to 0.26%.

Munis have significantly underperformed Treasuries and ratios have risen across the curve as tax-exempts look relatively cheaper compared to their taxable counterparts.

The five-year ratio jumped to 108.8% on Thursday from 103.6% at the end of last week. Since the beginning of the month, the ratio has risen from 101.3%.

The 10-year muni yield to Treasury yield ratio increased to 101% from 100.5% last Friday. It has also jumped from 96.2% at the beginning of March.

And the 30-year ratio rose to 98.1% on Thursday from 97.5% last Friday. It has also increased from 94.8% at the beginning of the month.

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