Munis Continue Slide as More Deals Sell

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Top-rated municipal bonds again finished weaker, traders said, as the last of the week's new issue supply came to market Thursday. Munis followed Treasuries lower ahead of Friday's U.S. employment situation report.

The yield on the 10-year benchmark muni general obligation rose six basis points to 2.58% from 2.52% on Wednesday, while the yield on the 30-year increased nine basis points to 3.35% from 3.26%, according to the final read of Municipal Market Data's triple-A scale.

While the yield on the 30-year muni has risen over 70 basis points in the last month, it is by no means a precedent-setting event.

"Is this the longest four-week increase in history? No," MMD Senior Market Strategist Daniel Berger wrote in a Thursday market comment. "In June 2013, during the infamous 'Taper Tantrum,' this maturity increased more than 90 basis points. Prior to that, this maturity range increased more than 100 basis points in October 2008, when the full impact of the Lehman Brothers collapse was felt in the muni market."

U.S. Treasuries were also weaker on Thursday. The yield on the two-year Treasury rose to 1.15% from 1.11% on Wednesday, the 10-year Treasury gained to 2.44% from 2.37%, while the yield on the 30-year Treasury bond increased to 3.10% from 3.01%.

The 10-year muni to Treasury ratio was calculated at 105.6% on Thursday compared to 106.9% on Wednesday while the 30-year muni to Treasury ratio stood at 108.1% versus 108.2%, according to MMD.

 

S&P Muni Bond Index Has Worst Month Since '08

The S&P Municipal Bond Index finished down 3.46% in November, the worst monthly total return since September 2008, according to S&P Dow Jones Indices.

"Expected tax rate changes could have a long-term impact on tax-exempt municipal bonds," said J.R. Rieger, managing director and global head of fixed income at SPDJI. "This could indicate lower future demand as the tax benefits of munis are more impactful for individuals in higher tax brackets. "

He said that as a retail-driven market, munis are especially sensitive to sharp changes in market sentiment.

"As a result, funds are flowing out of bond funds and putting additional, longer-term pressure on the muni market," he said. "However, the activity suggests yields are beginning to look attractive."

 

Primary Market

In the competitive arena, Texas sold $157.14 million of Series 2016 general obligation college student loan bonds, subject to the alternative minimum tax. Citigroup won the deal with a true interest cost of 4.10%.

The issue was priced to yield from 2.18% with a 6% coupon in 2021 to 3.95% with a 5% coupon in 2040. The deal is rated triple-A by Moody's Investors Service and S&P Global Ratings.

Some market participants noted it was the first deal in a long time where they saw 6% coupons on some maturities.

Since 2006, the Lone Star State has sold roughly $3.87 billion of securities, with the largest issuance occurring in 2013 when it sold $640 million. The lowest years of issuance came in 2014 and 2015, when the state came with $150 million in each year. Overall, when you include all of the different issuance across Texas, you get the second largest state issuer so far this year, with $50.41 billion as of Nov. 30.

Wells Fargo Securities priced Montgomery County, Texas' $121 million of Series 2016A unlimited tax road bonds and limited tax refunding bonds.

The $73.32 million of road bonds were priced to yield from 1.33% with a 4% coupon in 2018 to 3.58% with a 5% coupon in 2037; a 2039 maturity was priced as 5s to yield 3.62% and a 2042 maturity was priced as 4s to yield 4.14%.

The $47.68 million of refunding bonds were priced to yield 1.02% with a 3% coupon in 2017 and 1.33% with a 4% coupon in 2018 and from 2.14% with a 5% coupon in 2021 to 3.70% with a 3.5% coupon in 2030.

The deal is rated triple-A by Moody's and AA-plus by Fitch Ratings.

Piper Jaffray priced Portland Community College, Ore.'s $116.73 million of Series 2016 general obligation refunding bonds.

The issue was priced to yield 0.94% with a 2% coupon in 2017 and from 1.88% with 2% and 5% coupons in a split 2020 maturity to 3.16% with a 5% coupon in 2029. The deal is rated Aa1 by Moody's and AA by S&P.

Morgan Stanley priced the Alabama Economic Settlement Authority's $629.58 million of Series 2016 A&B BP settlement revenue bonds.

The $547.61 million of Series 2016B taxables were priced to yield about 125 basis points over the comparable Treasury security in 2025 and about 180 basis points over the comparable Treasury security in 2032.

The $81.97 million of Series 2016A bonds were priced as 4s to yield 4.24% in 2032 and 4.29% in 2033.

The deal is rated A2 by Moody's and A-minus by S&P.

 

Tax-Exempt Money Market Fund Inflows

Tax-exempt money market funds experienced inflows of $54.8 million, bringing total net assets to $130.09 billion in the week ended Nov. 28, according to The Money Fund Report, a service of iMoneyNet.com. This followed an inflow of $447.0 million to $130.04 billion in the previous week.

The average, seven-day simple yield for the 237 weekly reporting tax-exempt funds was unchanged at 0.16% from previous week.

The total net assets of the 867 weekly reporting taxable money funds increased $20.59 billion to $2.568 trillion in the week ended Nov. 29, after an inflow of $23.02 billion to $2.547 trillion the week before.

The average, seven-day simple yield for the taxable money funds was steady at 0.15% from the previous week.

Overall, the combined total net assets of the 1,104 weekly reporting money funds rose $20.64 billion to $2.698 trillion in the week ended Nov. 29 after inflows of $23.46 billion to $2.677 trillion in the prior week.

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