Market Close: Munis Grind Higher On Lack of Primary

The tax-exempt market ended Tuesday on a firm note for the second trading session this week and limited new issue supply has forced buyers to turn to the secondary market.

“We’ve had a decent run so far this year,” a Chicago trader said. “We will see how it plays out. It could easily grind a little Wednesday too.”

Many traders said that with firmer Treasuries, munis looked attractive on a relative basis.

“The market is feeling OK today,” a Los Angeles trader said. “It continues to feel constructive and the front end still feels pretty good and it’s holding up well. Treasuries are supportive today which they haven’t necessarily been over the last week and a half.”

This trader said firmer Treasuries are making municipals look more attractive on a relative basis. “We were rich to Treasuries coming in to today but the Treasury moves have helped a little. We are coming back into more attractive ratios.”

He added there is not a lot of supply this week which is helping give the market a good tone.

And other market participants said buyers were indeed forced to turn to the secondary because of limited primary.

“The market is up a bit,” a New York trader said. “There are buyers.”

Still, some said the market was not as strong as some think. “I think it’s a bifurcated market,” a second Chicago trader said. “Institutional customer block sizes seem active which is giving the impression that there is decent activity. My perception is there was a tremendous amount of individual selling late last year and there is a decent amount of line item built up inventory and it’s not necessarily trading like the more liquid institutional blocks. So I think it’s a tale of two markets.”

This Chicago trader said the short end and the long end of the market were stronger but the belly of the curve was steady. “The belly of the curve is not as strong. You really have be special in the 10-year to 25-year part of the curve.”

In the competitive market, Ohio auctioned $216.4 million of infrastructure improvement general obligation bonds in two series, rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.

Bank of America Merrill won the bid for the first series of $150 million. Yields ranged from 0.17% with a 2% coupon in 2014 to 3.00% with a 4% coupon in 2033. The bonds are callable at par in 2022 except those maturing in 2023.

JPMorgan won the bid for the second series of $66.4 million of refunding bonds. Yields ranged from 0.70% with a 5% coupon in 2016 to 2.21% with a 5% coupon in 2025.

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

Yields on Pasadena, Texas, Independent School District 5s of 2020 plunged six basis points to 1.28% while Lehigh County, Penn., General Purpose Authority 3.7s of 2033 dropped three basis points to 3.83%.

Yields on Santa Clara Valley, Calif., Water District 4s of 2023 and California 5.5s of 2018 fell three basis points each to 1.87% and 1.21%, respectively.

Yields on Minnesota 5s of 2 021 and Georgia 5s of 2019 fell one basis point each to 1.42% and 1.04%, respectively.

On Tuesday, the Municipal Market Data scale finished several basis points stronger after finishing higher Monday. The 10-year MMD yield plunged five basis points to 1.73% while the 30-year yield dropped four basis points to 2.83%. The two-year closed flat at 0.36% for the fifth consecutive session.

Treasuries posted gains Tuesday following a firmer session Monday. The benchmark 10-year yield and the 30-year yield dropped three basis points each to 1.87% and 3.07%, respectively. The two-year yield fell one basis point to 0.26%.

And while some traders said munis looked attractive relative to Treasuries, yields on munis fell much more than yields on Treasuries. Munis outperformed their taxable counterparts and became relatively more expensive as ratios fell.

The five-year muni-to-Treasury ratio dropped to 102.6% on Tuesday from 103.7% on Monday. Munis were still more attractive than last week, when the ratio closed at 102.4% on Friday.

The 10-year muni yield to Treasury yield ratio fell to 92.5% on Tuesday from 93.7% on Monday. The ratio continued to fall from where it finished last week at 93.8%.

Similarly, the 30-year ratio dropped to 92.5% on Tuesday from 92.6% on Monday. It continued its decline from 92.9% on Friday.

And while the municipal market has been strong over the past two trading sessions due to lack of supply, many say the real test for the market will come mid-January when the calendar builds.

“Relative muni yields declined fairly sharply,” wrote George Friedlander, chief municipal strategist at Citi. “It is important to note, however, that the strong relative tone in munis has also been supported by a lack of new issue supply; with supply and demand both quite limited in late December and early January. As a consequence, price discovery remains quite limited, and we could see significant revaluations — in either direction — once the new issue market reopens in earnest around mid-January.”

And while the late December selloff made munis look much more attractive on an absolute basis, Friedlander notes very little trading activity occurred during those last few weeks in December. “The actual drop in many components of the muni market was actually substantially greater than on the MMD curve, which measures yields on highly favored triple-A 5% coupon bonds,” he wrote. “It is also important to note, however, that relatively little paper was actually transacted at or near the bid side at the weakest phase of the market.”

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER