The tax-exempt market ended stronger on this holiday-shortened week as minimal new issue supply pushed bond prices higher.
And while it was expected to be a relatively quiet week, continuing woes from Cyprus and the downgrade of Puerto Rico’s Aqueduct and Sewer Authority helped increase volume.
“It was very quiet from a new issue standpoint, which was beneficial to the market because they have been running fairly heavy calendars and this gave the secondary a chance to clean up,” said Pete Stare, underwriter at FirstSouthwest. “The market also benefitted from turmoil in Europe and Cyprus and caused a flight to quality in Treasuries. While we didn’t perform in lockstep with Treasuries, munis benefitted from a run up in prices which followed over in our market.
Other market participants agreed the limited new issue calendar allowed to market to turn to the secondary for direction. “There was not a lot on the primary calendar with only about $2.5 billion and the secondary was ill attended,” said Brian Battle, director of trading at Performance Trust. “There were not a lot of bonds traded so it was hard to observe price action, but there was certainly no pressure to sell.”
Late Tuesday evening, Standard & Poor’s downgraded PRASA to BB-plus from BBB-minus, pushing the authority to “junk” status.
Yields on PRASA bonds widened. In a block trade Thursday, a dealer sold to a customer 5.75s of 2037 at 5.82%, up two basis points from where the bond was sold Tuesday before the downgrade.
In another block trade Wednesday, a dealer sold to a customer 5s of 2033 at 5.72%, up five basis points from a comparable block trade Tuesday.
The fallout of the PRASA downgrade spread to the commonwealth’s general obligation bonds.
Yields on the 10-year GO jumped seven basis points to 5.01% on Wednesday from 4.94% on Monday. The 15-year yield climbed 19 basis points to 5.58% after the downgrade from 5.39% before. The 20-year yield jumped 12 basis points to 5.57% on Wednesday from 5.45% on Monday.
Similarly the 25-year yield spiked up 24 basis points to 5.72% from 5.48% and the 30-year yield soared 34 basis points to 5.74% on Wednesday from 5.40% on Monday.
News of the downgrade of PRASA didn’t affect the rest of the market, Stare said. “It wasn’t a big surprise and it didn’t have a big impact on the market overall.”
Outside Puerto Rico, traders said the rest of the secondary market saw better activity than in previous weeks.
“It wasn’t commanding but this week did give the secondary a chance to lighten up and clean up balances left over from previous weeks,” Stare said.
Trades reported by the Municipal Securities Rulemaking Board showed high levels of activity on Tuesday and Wednesday.
On Monday there were 38,834 trades, down from the 30-day average of 40,351 trades. Par value traded was $7.905 billion, down significantly from the 30-day average of $10.600 billion.
Activity on Tuesday notably increased. There were 41,056 trades, up from the 30-day average of 40,482 trades. Par value traded at $10.917 billion came in just above the 30-day average of $10.689 billion.
Wednesday’s activity was also high. There were 41,799 trades, up from the 30-day average of 40,528 trades. Par value traded was $13.431 billion, up from the 30-day average of $10.813 billion.
In retail trades of under 100 bonds — or $100,000 par value — secondary activity was the lowest its been in the past five week, according to data from BondDesk Group.
There were 60,582 buy trades for the week ending March 27 compared to the previous week’s 62,567 buy trades. The number of buy trades was the lowest in the past five weeks.
Sell trades were also down to 34,608 versus the previous week’s 37,243 trades. The number of sell trades was also the lowest in the previous five weeks.
The ratio of buy trades to sell trades came in at 1.8, higher than the 1.7 posted during the previous five weeks.
Dollar volume traded also slipped the week ending March 27. There were $1.666 billion buy trades for the week compared to the $1.727 billion buy trades for the week before. Sell trades also slipped to $982 million from the previous week’s $1.054 billion sell trades.
The ratio of buy trades to sell trades in dollar amount came in on par with previous weeks at 1.7.
Through Thursday, yields on the 10-year Municipal Market Data triple-A GO scale fell three basis points to 1.91% while the 30-year yield dropped one basis point for the week to 3.09%. The two-year was steady at 0.31%.
Yields on the 10-year Municipal Market Advisors 5% coupon triple-A benchmark scale ended four basis points lower through Thursday to 1.96%. The two-year and 30-year yields were steady for the week at 0.33% and 3.19%, respectively.
Treasuries ended much stronger for the week. The benchmark 10-year yield slid seven basis points for the week through Thursday to 1.85% while the 30-year yield dropped three basis points for the week to 3.11%. The two-year yield fell one basis point to 0.25%.
And with munis underperforming Treasuries, Battle says munis could outperform next week. “Since March 11, 20-year munis sold off about one basis point while Treasuries are stronger by 20 basis points. So we’ve really underperformed Treasuries and we could get some of that back next week.”
