Market Post: Munis Have Delayed Reaction to High GDP

The municipal market had a delayed reaction to the higher-than-expected GDP growth reported Wednesday morning, weakening across the curve on Thursday as Treasuries strengthened.

Yields for the bonds maturing in 26 to 30 years rose by two to four basis points, and by one to three basis points for bonds maturing in seven to 25 years, according to Municipal Market Data's triple-A scale. Bonds maturing in six years yields increased as much as two basis points, and by up to one basis point for four- to five-year maturities.

A trader in the Midwest said this was a delayed reaction to the Treasury yield hike Wednesday, when the 30-year's yield jumped eight basis points to its highest point so far in 2014 at 3.31%, and the 10-year rose by 10 basis points to 2.56%.

"Nothing is really going on in the market besides munis weakening, that's because of yesterday's Treasury sell-off," he said.

Treasury yields fell slightly on Thursday with the two-year note's yield falling by two basis points to 0.55%, the 10-year by one basis point to 2.55%, and the 30-year also by one basis point to 3.30%.

Second quarter GDP came in higher than analysts predicted, at 4% growth. First quarter GDP showed a 2.1% contraction. Historically Treasuries and municipal bonds do not perform well when positive economic data is reported.

"People have been generally bearish on Treasuries all year, any bit of downside people get spooked," the trader said. "They think, 'If I can just punch some bonds to mitigate risk on the downside, it's worth it.'"

He said any signs there might be a bit of downside in Treasuries causes panic in both Treasuries and municipal bonds.

"Everyone is waiting for a big sell-off in Treasuries to happen, [a sell-off of] 30 to 40 basis points," he said.

The trader said the secondary market was quiet, and that he is holding his cash until later.

"You'll see, say Maryland GOs and Texas PSFs [trading], but you'll just see two traders swapping them," he said. "Lots of prints but you are not seeing legitimate bids, it is you'll take mine I'll take yours, but not like 'Hey I'll show you a bid on these bonds.' The price of liquidity is much higher than the MMD shows."

In the primary market, Barclays Capital received the written award on $292.5 million Illinois Sports Facility Authority refunding bonds. The deal was priced to yield from 0.57% with a 3% coupon in 2015, to 4.17% with a 5.25% coupon in 2032. The deal's rating is split, with an A from Standard & Poor's and a BBB-plus from Fitch Ratings.

"The Illinois deal is the most interesting deal coming to market today," a New York trader said earlier. "There's a split in the rating. Some view the deal as a state appropriation. There's pretty good coverage going in. Some of the series has insurance on it, which helps with liquidity."

Traders are expecting the state tax-supported deal to be in high demand since the issuer does not frequently enter the market.

Bonds maturing between 2026 through 2032, which is the latest maturity, are backed by Assured Guaranty insurance.

"Insurance helps make the deal attractive," the New York trader said. "It's a novelty issuer and with rates so low people are grasping for anything with extra spread. There are enticing spreads with or without the insurance."

Traders predicted that if Moody's Investors Service had given the credit a rating it would be similar to the rating it received from Fitch, though traders said that, "S&P's rating holds more weight than Fitch.

Barclay's Capital also priced the $748.62 million of California State University Trustee revenue bonds, the largest deal of the week. Yields ranged from 0.33% with a 3% coupon in 2016 to 3.63% with a 5% coupon in 2044. There is an optional call at par in 2024, and the deal contains think sinking funds with term bonds in 2038, 2039, and 2044.

"It's a big deal and funding from the state in the short term has stabilized," the trader said. "There are some concerns because the deal relies on the state to back it up. It's a high tax state and there's always demand for and need for Cali paper."

The deal is rated AA-minus by S&P.

Wells Fargo will price a two-part deal totaling $143.5 million of Austin Independent School District tax refunding bonds. The deal is rated AAA by Moody's and AA-plus by both S&P and Fitch.

"A part of the deal has its own backing on it, which is very strong," the trader said. "Austin's economy is doing well and growing like other parts of Texas, anchoring from the military and universities. It's a secure investment."

Bosc will market $113 million of Manor Independent School District, Texas, general obligation bonds. The deal is rated Aaa by Moody's.

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