The municipal bond rally marched on Wednesday as volatility in the stock market drove cash into safe assets despite a large range of deals entering the market.
“Buyers have a lot of money to put to work,” said a trader in New York. “There were all sorts of buyers and even a few funds in there today.”
Certain spots on the yield curve fell as much as five basis points and the primary market was firm.
“New issues are running ahead of the market,” the trader said, noting the high-grade Wisconsin deal acted as a bellwether and caused participants to re-mark prices higher.
The 10-year muni yield fell four basis points to 2.70%, its lowest since Nov. 12, 2010, and extending its rally to 57 points from April 11. The two-year yield fell four basis points to 0.50% and the 30-year yield fell two basis points to 4.43%.
Tax-exempt prices have been steady or rising for the last 22 sessions.
“There is a bond grab,” said a trader in California, who said new issues were being absorbed easily, so few people are concerned the rally is coming to an end.
“Some guys are having difficulty adjusting, but if munis stay at these levels they won’t have a choice but to adjust,” he said.
The strong demand helped underwriter Citi slash yields by five to seven basis points across the curve as it sold $276 million of general obligation debt for Wisconsin. Rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings, the bonds offered yields from 0.62% in 2013 to 3.19% in 2022.
“The Wisconsin bump underscored the amount of bond redemption money that is sitting on the sidelines, waiting for any concession to the market to pounce,” wrote Randy Smolik in his daily commentary for MMD.
Wells Fargo brought $600 million of Virginia Department of Transportation revenue bonds to market. The deal was rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch. It offered yields from 2% in 2018 to 4.60% in 2036.
Jefferies & Co. priced $327.5 million of school district revenue bonds for the Dormitory Authority of New York, in four series.
Series A, rated A1 by Moody’s and an equivalent A-plus by Standard & Poor’s and Fitch, offered yields ranging from 0.85% in 2012 to 4.80% in 2030.
Series B and D carried Aa3 and AA-plus ratings thanks to a credit wrap from Assured Guaranty. Yields ranged from 0.73% in 2012 to 5.25% in 2039.
Series C, unenhanced but rated Aa3 by Moody’s and A-plus by S&P and Fitch, offered yields ranging from 0.80% in 2012 to 4.24% in 2025.
“They are pooled loans so there are different underlying ratings for each of the series,” a source at the underwriter said.
Trading of Treasuries was volatile but yields finished lower throughout, helping to keep muni valuations attractive. The two-year Treasury yield dropped four basis points to 0.55%, the 10-year yield fell five basis points to 3.17%, and the 30-year yield was slashed three points to 4.31%.
In a strategy note published Tuesday, Citi analysts noted the recent co-relation among muni and Treasury price movements suggests the idea that the two markets have diverged — which became popular during the financial crisis — might be overhyped.
“While a lot of ink has been [spilled] discussing the transition of tax-exempts from rates to credit space, the recent spike in correlations could make one wonder if the prognosis is premature,” they wrote.
They say correlations are strongest with high-quality paper in the short to intermediate range, but weaker among long-term munis, which continue to suffer from negative credit perceptions.
Among lower-grade paper, the transition of munis from a spread-based product to becoming a credit-based product is more pronounced, they noted, adding that yield volatility can be greatest on long paper.
In new economic data, the monthly trade deficit widened $2.7 billion in March to $48.2 billion.
“Strong export performance was almost entirely wiped out by a $6 billion surge in the oil import bill,” noted Gregory Daco, senior economist at IHS Global Insight.