Market Close: Munis Stay Firm as Economic Data Hurts Treasuries

Strong technicals in municipals have shielded the asset class from this week's economic indicators.

"Supply is still too tight for something like [gross domestic product] to impact the market right now," a trader based in New York said.

"Supply and demand is the most important factor keeping the market in."

As Treasuries climbed across the curve, the muni market largely shrugged off a report Wednesday that the GDP grew 4% in the second quarter as supply remained sparce and demand high.

The 30-year Treasury yield climbed upward eight basis point to 3.31%, its highest point so far in 2014, while the 10-year benchmark jumped 10 basis point to 2.56%.

The two-year inched up two basis points to 0.57%.

The reaction was more muted in municipals, as the short end of the curve remained unchanged, while yields rose four basis point among the intermediate maturities, according to Municipal Market Data's triple-A scale.

Yields rose three basis points at the long end of the curve.

"I have my doubts [that munis would follow Treasuries] because supply remains very tight," according to a trader based in New Jersey.

"The 30-day supply isn't at the lowest point of the year, but it's still very low," he said.

"I don't know if this one-day move in Treasuries will be enough to drag munis with it," the muni bond trader added.

While a strong GDP report and significant Treasury movement would not be enough to tangibly affect the municipal market, Wednesday's announcement coupled with a strong unemployment announcement on Friday might have the strength to overcome the market's strong technicals, traders agreed.

"You'll need consistent, strong data to break the momentum in municipals," said a Chicago trader. "A strong jobs report will put more pressure on the market. The technicals are just too strong for uneven data."

A weak jobs report on Friday would also probably reverse any impact the GDP announcement had on Treasuries as well, the New York trader noted.

According to Municipal Market Advisors' data yield movement also showed a muted reaction.

The two-year's yield fell one basis point to 0.30%, while the 10-year and the 30-year both rose by one basis point to 2.18% and by four basis points to 3.41%, respectively.

The jumps in Treasuries didn't make a dent in the strong municipal primary market.

Trading in the secondary brought slightly wider yields, but the primary kept up its steam, with debt placing successfully and pricing aggressively, the Chicago-based trader said.

The city of Suffolk, Va., sold its $124.745 million general obligation and refunding bonds, with Bank of America Merrill Lynch winning the bid with a true interest cost of 3.1075%.

The deal was priced to yield from 0.11% with a 3.0% coupon in 2015 to 3.72% with a 3.50% coupon in 2042, according to data provided by TM3.

It has an optional call feature on Feb. 1, 2024.

The deal was bid on aggressively, continuing the demand trends of the summer, with around eight bidders for the debt, a relatively high amount, the Chicago trader said.

"The scales were cut slightly, but we barely saw it," he said. "There was a good retail follow through as well."

Standard & Poor's rated the deal AAA, Fitch Ratings gave it a AA-plus, and Moody's Investors Service rated the deal Aa1.

Proceeds will go toward various capital improvement projects, as well as retire some of the issuer's outstanding debt. The issuance will raise the city's debt load to $361.4 million.

Bank of America Merrill won the Harris County, Texas, $55.65 million unlimited general obligation tax bonds, according to data from TM3.

The debt issuance was priced to yield from 0.21% with a 5% coupon in 2015 to 4.05% with a 4% coupon in 2038 and the bond offering has a call feature on Sept. 1, 2022.

The proceeds will redeem $27.665 million of Series 2013 bond anticipation notes and finance various capital improvements. The bonds are rated A2 by Moody's analysts.

The largest negotiated muni bond offering of the day was the city of San Antonio's general improvement and refunding bonds.

Yields ranged from 0.10% on a 2.00% coupon in 2015, to 3.44% on a 4.00% coupon in 2034.

The deal was rated triple-A by all major rating agencies.

Secondary market trading saw yields soften slightly among major issuers.

Yields for Buckeye Tobacco bonds 5.875s in 2047 weakened to 7.69% from 7.67% on Wednesday, mirroring yields on the Tobacco Settlement Financing Corporation's 5s in 2041 which rose to 7.21% from 7.15%, according to data provided by Markit.

State-level municipal yields weakened as well.

Yields on California state general purpose 5s in 2043 increased to 3.64% from 3.60%, while yields on the Illinois state general obligation pension fund 5.1s in 2033 increased to 5.26% from 5.25%, according to data provided by Markit.

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