The municipal bond market performed well this week as traders said new deals were well received and the secondary market saw a muted selloff given negative seasonal factors.
"Despite strong headwinds such as over $7 billion in supply, a strong equity market, and a lot of selling due to tax season, the muni market performed well," said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management.
Other traders agreed that despite negative technical, the muni market held up fairly well. "For a significantly larger new issuance week, the negative headlines surrounding fixed income about the great rotation, and the outflows that softened the market, performance this week was actually pretty good," said James Colby, senior municipal strategist and portfolio manager at Van Eck Global.
In the primary market, Bank of America Merrill Lynch and Morgan Stanley priced for institutions $2.72 billion of California various purpose general obligation bonds Thursday, rated A1 by Moody's Investors Service, A by Standard & Poor's, and A-minus by Fitch Ratings. The deal was upside from $2.1 billion.
Retail bought 37.7% of the total offering, or 72.3% of the $1.07 billion offered for retail. The state last came to market March 14 with $2.11 billion of tax-exempt GOs. Retail bought 37.7% of that deal and 89.4% of what was offered for retail.
Spreads on the first series of $1.25 billion of GOs with 5% coupons maturing between 2016 and 2042 ranged from 23 basis points to 79 basis points above Wednesday's Municipal Market Data scale.
The last time the issuer came to market with various purpose GOs on March 14, spreads on 5% coupons ranged from 27 to 79 basis points above the previous day's MMD scale.
On the second series of $1.47 billion of refunding GOs, bonds with a 5% coupon maturing between 2016 and 2033 had spreads ranging from 23 to 80 basis points above Wednesday's MMD scale.
The last time California came to market on March 14 with various purpose GO refunding bonds, spreads ranged from 27 to 83 basis points above the previous day's MMD scale.
"The California deal went well," said Heckman. "It was upsized and spreads were similar to the last large issue in California so pricing levels were attractive for buyers."
He added that muni to Treasury ratios are extremely attractive, particularly in the belly of the curve. "The 10-year ratio is well above 110% and the highest in seven to eight months. So when you have a high tax bracket state like California, munis look attractive on a relative basis."
Also in the primary market, Barclays priced $2 billion of Florida Hurricane Catastrophe Fund Finance Corp. taxable revenue bonds Wednesday, rated Aa3 by Moody's, AA-minus by Standard & Poor's, and AA by Fitch.
Heckman said the Florida deal was also well received. "There is a lack of high quality debt so even if it's a taxable deal investors are very much interested in those types and structures."
Van Eck's Colby said the primary market offered something for everyone. "Bonds were digested and it was an interesting diverse group of issuers so there was certainly something for everyone," Colby said. "There was some hesitancy in the market where traders were looking for leadership on deals and waiting for someone to buy a chunk of bonds. Once that happened, the buyers were falling into place."
In the secondary market, Heckman said trading was sloppy due to selling pressure. "We saw highs on the equity markets this week and a continuation of asset allocation shift out of bonds so there were secondary bid requests this week. There was also a lot of issuance this week and that has created a little volatility to the downside."
Specifically, Heckman saw a lot of weakness in the five- to 10-year range. "The six- to nine-year range is the steepest part of the curve and a good place to be now."
Colby agreed that there was selling pressure in the secondary. "There was some selling going on that defined new levels. Traders said they weren't getting out of positions as much as trying to find what the new appropriate clearing levels were for the market." Generally, fixed income has been under pressure as equity markets hit new highs this week. But some underlying fears about Japan, Cyprus, and North Korea kept the fixed income selloff at bay, Colby said. "Despite the fact that yields are trending somewhat higher, the secondary was only trying to reshuffle and find levels where bidders were comfortable making commitments."
Trades reported by the Municipal Securities Rulemaking Board showed higher levels of activity as the week progressed. By Wednesday, there were 43,558 trades, up from the 30-day average of 40,642 trades. Par value traded was $15.711 billion, up from the 30-day average of $11.533 billion.
On Thursday, there were 43,067 trades, up from the 30-day average of 40,618 trades. Par value traded was a whopping $17.199 billion, up significantly from the 30-day average of $11.655 billion.
Through Thursday, yields on the 10-year MMD triple-A GO scale rose three basis points to 1.74% and the 30-year yield jumped four basis points for the week to 2.97%. The two-year was steady for the week at 0.29%.
Yields on the 10-year Municipal Market Advisors 5% coupon triple-A benchmark scale increased two basis points to 1.81% through Thursday and the 30-year yield rose one basis point to 3.06%. The two-year was steady for the week at 0.32%.
