Traders in the tax-exempt market said munis traded stronger Thursday, though the small rally started to slow by the afternoon.
Munis posted gains all week and after several strong sessions, traders were worried the market was looking rich again.
“I am not sure why they are still strong,” a San Francisco trader said. “I know they [follow] Treasuries but we’ve seen a few real strong days.”
He added a still relatively small new-issue calendar could be the driving force. “It could be limited issuance or higher taxes, but I think we are still waiting to see what is happening with the cap on tax-exemption and you’d think that would cheapen things up but it hasn’t.”
Even with a few deals hitting the primary market Thursday, there was still a lot of activity in the secondary. “We are still focused on the secondary mostly,” the trader said. “There are a couple deals coming through but I’m just not finding that structure I like.”
Other traders seemed surprised by the gains as well. “I’m a little surprised by the strength that has continued in munis,” an Atlanta trader said. “I thought we’d take a rest but we are seeing good activity today. It has died down a little but earlier today people were coming in on new offerings and grabbing them.”
He added he is looking to the $210.7 million triple-A rated Mecklenburg County, N.C., deal as an indicator of market strength.
In the primary market, Jefferies & Co. priced for institutions $903.7 million Metropolitan Transportation Authority’s Triborough Bridge and Tunnel Authority refunding bonds, following retail pricing Wednesday. The bonds were expected to price this past December, but were postponed due to market conditions.
The sale included $656 million of subordinate revenue refunding bonds, rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s and Fitch Ratings, and AA-minus by Kroll Bond Rating Agency.
Yields ranged from 0.40% with a 2% coupon in 2014 to 3.20% with a 3.125% coupon in 2032. The bonds are callable at par in 2023.
The sale also contained $247.7 million of general revenue refunding bonds, rated Aa3 by Moody’s, AA-minus by Standard & Poor’s and Fitch, and AA by Kroll.
Yields ranged from 1.20% with 4% and 5% coupons in a split 2019 maturity to 2.62% with a 5% coupon in 2030. The bonds are callable at par in 2023.
Wells Fargo Securities priced the Mecklenburg County, N.C., general obligation refunding bonds.
Yields ranged from 0.18% with a 2% coupon in 2013 to 2.26% with a 5% coupon in 2027.
In the competitive market, Wells Fargo won the bid for $306.1 million of Florida Department of Transportation revenue bonds, rated Aa3 by Moody’s and AA-minus by Standard & Poor’s and Fitch.
Yields ranged from 0.25% with a 3% coupon in 2013 to 3.625% with a 3.5% coupon in 2042. The bonds are callable at par in 2022.
In the secondary market, trades compiled by data provider Markit showed strengthening.
Yields on New Jersey’s Tobacco Settlement Financing Corp. 5s of 2041 and Massachusetts School Building Authority 5s of 2041 dropped three basis points each to 5.72% and 2.95%, respectively.
Yields on California Statewide Communities Development Authority 5s of 2042 also fell three basis points to 3.36% while Dormitory Authority of the State of New York 5s of 2042 fell two basis points to 3.09%.
Yields on Texas Turnpike System 5s of 2041 dropped two basis points to 3.83% while Mississippi Development Bank 3.125s of 2023 fell one basis point to 3.19%.
Traders said the secondary was seeing activity despite an increase in supply this week.
“Wednesday was one of the busier days from the secondary activity in recent weeks,” wrote Dan Toboja, vice president at Ziegler Capital Markets. “More liquid, higher-rated healthcare paper was trading particularly well. Customer bid lists were relatively light, and the weak primary market pushed yields on the secondary down.”
He added the Tift County, Ga., Hospital Authority bonds issued Wednesday for the Tift Regional Medical Center traded ten basis points higher after hearing is was 10 times oversubscribed in pricing. “Market tone had a distinct shift; sellers actually felt more in control as bids have marched up.”
Still, not all market participants are confident these gains can be sustained. “While few participants are willing to say that the market is here for the long-term, spreads have tightened significantly from the late December selloff,” Toboja noted.
“The most important variables in the market right now are the coming debt-ceiling talks and how they’ll affect muni exemption and the supply. If new issues begin to build and talks begin to deteriorate again we may well see a repeat of late December.”
And not all reads on the market showed a rally. The MMD scale ended weaker after posting three sessions of gains. The 10-year yield rose one basis point to 1.70%. The two-year and 30-year yields finished steady at 0.34% and 2.80%, respectively.
Treasuries also posted losses on Thursday after a week of gains. The benchmark 10-year yield jumped four basis points to 1.90% while the 30-year yield increased two basis points to 3.08%. The two-year yield rose one basis point to 0.26%.
