NEW YORK – Demand in the tax-exempt market remains high, even with the uptick in supply seen this week. Traders have noted that a third of this week’s deals have been from California issuers, and so supply really isn’t as high as it looks.
Traders also noted that with limited supply, they are struggling to get as many bonds as they want.
“Rates haven’t changed much and they haven’t done much all week,” a New Mexico trader said. “Volume of new issuance remains low and demand remains high so prices are high. There are not deals this week we’re expecting to buy and it’s the same as it has been for months. We are not participating because it’s too expensive.”
The trader added it has been hard to find bonds in large blocks. “It’s hard to find something worth buying. And if you do, it’s a tiny amount. Buying blocks under five million doesn’t make much of a difference because it’s so small. So we’ve had a good year to date, but it will be hard to sustain.”
Munis continued to weaken Thursday early afternoon, according to the Municipal Market Data scale. Yields inside three years were steady while yields outside four years rose up to five basis points across the curve.
On Wednesday, the two-year yield ended steady at 0.26%, its record low as recorded by MMD on Feb. 16. The 10-year and the 30-year yields rose one basis point each to 1.85% and 3.23%, respectively.
Treasuries continued to weaken Thursday afternoon, with yields rising to levels not seen since last Wednesday. The benchmark 10-year yield jumped seven basis points to 2.05% while the 30-year yield spiked up eight basis points to 3.17%. The two-year was steady at 0.31%.
In the primary market, JPMorgan priced for institutions $2 billion of California various purpose general obligation refunding bonds, following a two-day retail order period. The credit is rated A1 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch Ratings. Pricing information was not yet available.
Retail investors placed $765 million of orders in the first day of retail, or 38.4% of the total offering. By the end of the second day of retail, $930.7 million orders had been placed, or 47% of the total offering. The retail deal was repriced to lower yields on maturities outside 10 years by about one basis point.
JPMorgan also priced $125.4 million of State of New York Mortgage Agency homeowner mortgage revenue bonds in four series, rated Aa1 by Moody’s. Pricing details were not available by press time.
In the competitive calendar, Louisiana auctioned $445.2 million of GOs in two auctions – a $400 million deal and $45.2 million. The credits are rated Aa2 by Moody’s and AA by Fitch.
JPMorgan won the bid for $400 million. Yields ranged from 2012 with a 2% coupon to 2031 with a 4% coupon. Prices were not available.
Morgan Stanley won the bid for $45.2 million. Prices were not available.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening.
Bonds from an interdealer trade of California 6.65s of 2022 yielded 4.08%, seven basis points higher than where they traded Wednesday.
A dealer sold to a customer Connecticut Health and Educational Facilities Authority 5s of 2041 at 4.40%, five basis points higher than where they traded Wednesday.
A dealer bought from a customer New York City Municipal Water Finance Authority 5s of 2045 at 3.84%, four basis points higher than where they traded Wednesday.
A dealer sold to a customer Illinois 5.1s of 2033 at 5.48%, two basis points higher than where they traded Wednesday.
For the entire month of February, ratios have fallen as munis outperformed Treasuries and became more expensive. The five-year ratio ended at 77.3% on Wednesday, down from 100% at the beginning of the month. The 30-year ratio ended at 104.5%, down from 106.8% at the beginning of February. The 10-year muni-to-Treasury ratio was the anomaly, rising slightly to 93.4%% from 93.3%.
The slope of the yield curve also fell throughout the month. The 10- to 30-year slope fell to 138 basis points from 146 basis points at the beginning of the month.
Investors have also moved out on the credit scale throughout February, especially in the 10-year range. But, investors pulled back from lower-rated credits on the long end. The 10-year triple-A muni to single-A muni spreads fell to 89 basis points at the end of the month from 91 basis points at the beginning of the month. Spreads fell down to 88 basis points mid-month before rising back up.
The 30-year triple-A to single-A spreads rose to 82 basis points from 79 basis, showing buyers are less willing to take credit risk longer out on the yield curve.
The two-year and five-year triple-A to single-A credit spreads were steady at 44 basis points and 72 basis points, respectively.
