Market Close: Buyers Emerge In Secondary On Primary Reprieve

With the largest deals of the week pricing Tuesday and the remainder pricing Thursday, a quiet primary market on Wednesday led to a more active secondary.

Traders said they turned their attention back to the secondary market as active buyers in the morning continued into a firmer afternoon.

“There are buyers out there,” a New York trader said, adding the market traded stronger. He noted the firmer trades came a day after the week’s largest deals were relatively well received in the primary.

Other traders said buyers stepped up in the secondary. “The last big trading days were around the payroll number two weeks ago and then it went back to being dead quiet,” a Chicago trader said. “But this morning there was a lot firmer tone and a better feel.”

While the secondary market seemed to take the attention mid-week, this trader added there were more than 40 deals that were larger than $100 million in the primary. “People are focused on that too.”

This trader also noted that the market has seen six consecutive weeks of outflows, and he views that as bullish for the market. “Truthfully I start to look at extended weeks of outflows as a bullish indicator,” he said. “Retail is the last to the party. So by the time you see six to seven weeks of outflows, munis are up 30 basis points.”

In addition, heavy redemptions for May and June are supportive for the market. “Redemptions are always very large and so there is some support. And as an asset class, we are still cheap in relation to taxables.”

Other market participants agreed that while there is a growing primary calendar, munis are cheap relative to taxables. “The calendar in the coming weeks continues to grow,” wrote Dan Toboja, vice president at Ziegler Capital Markets. “The 30-day visible is over $11 billion. With cheap ratios - over 100% - and tax day in the rear-view mirror munis don’t look to be giving up significant ground in the near-term.”

Back in the primary market Wednesday, Bank of America Merrill Lynch priced $212.8 million of Georgia Development Authorities pollution control revenue bonds for the Oglethorpe Power Corp. projects. The bonds are rated Baa1 by Moody’s and A by Standard & Poor’s and Fitch.

Bond in the first series, $40.5 million of Development Authority of Appling County, were priced at par to yield 2.4% in 2038.

Bonds in the second series, $114.6 million of Development Authority of Burke County, were priced at par to yield 2.4% in 2040.

Bonds in the third series, $57.7 million of Development Authority of Monroe County, were priced at par to yield 2.4% in 2039.

Bank of America Merrill Lynch also priced $170.7 million Charlotte, N.C., certificates of participation. The credit is rated Aa2 by Moody’s and AA-minus by Standard & Poor’s and Fitch.

Bonds in the first series of $122.7 million yielded 2.39% and 2.49% with 3% coupons in a split 2022 maturity.

Yields on the second series of $48 million ranged from 0.49% with a 4% coupon in 2015 to 3.24% with a 5% coupon in 2033. Bonds maturing in 2014 were offered via sealed bid. The bonds are callable at par in 2023.

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

Yields on California 5s of 2025 dropped four basis points to 2.65% and New York’ Metropolitan Transportation Authority 5s of 2043 slid three basis points to 3.69%.

Yields on Ohio 5s of 2020 and Cook County, Ill., 5s of 2026 fell two basis points each to 1.43% and 2.92%, respectively.

Yields on Maryland Department of Transportation 5s of 2025 and Florida State Board of Education 5s of 2026 fell one basis point each to 1.95% and 2.29%, respectively.

Activity in the secondary Wednesday was a nice reprieve from Tuesday’s quiet session. “The secondary was quiet overall Tuesday as the new issues took most of the attention of market participants,” Ziegler’s Toboja noted. “The new issues were well received and there were plenty of them with almost 10 deals larger than $100 million.”

Municipal bond scales ended a few basis points firmer Wednesday after a mixed session Tuesday. The muni market also posted gains Monday.

Yields on the Municipal Market Data triple-A GO scale ended as much as four basis points lower. The 10-year yield dropped two basis points to 1.70% and the 30-year yield fell three basis points to 2.90%. The two-year closed steady at 0.29% for the ninth session.

Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale ended as much as three basis points lower. The 10-year yield fell one basis point to 1.77% and the 30-year yield slid two basis points to 3.03%. The two-year was flat at 0.32% for the ninth session.

Treasuries had a choppy session Wednesday and reversed most of the morning gains by the afternoon. By market close, the 10-year yield was down one basis point to 1.71% and the 30-year yield dropped two basis points to 2.89%. The two-year was flat at 0.23%.

In economic news, the Federal Reserve’s Beige Book said reports from the 12 Federal Reserve Districts indicate the economy grew stronger from late February to early April.

“Activity in the Cleveland, Richmond, St. Louis, Minneapolis, and Kansas City Districts was characterized as growing at a moderate pace, while the Boston, Philadelphia, Atlanta, Chicago, and San Francisco Districts noted modest growth,” the report states. “The New York and Dallas Districts indicated that the pace of expansion accelerated slightly since the previous Beige Book.”

Manufacturing was particularly stronger from the previous report, with most districts reporting increased activity in that sector. There was also notable strength coming from the resident construction and automobile industries.

Jennifer Lee, economist at BMO Capital Markets, said, overall the tone wasn’t too negative and there is “no evidence of a sharp slowdown from the Beige Book.”

She added that “There was an ever-so-slight upgrade, in fact, to the assessment of economic activity, which is now being described as expanding at a “moderate” pace, compared to the previous report which said modest to moderate.”

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