Muni Traders Stage Foray Into the Secondary

While Monday was a busy day in the primary market, traders looked to the secondary on Tuesday for the action.

The municipal bond market ended on a mostly steady tone as traders said bids in the secondary market showed both gains and losses.

“Munis seem to be holding their own,” a San Francisco trader said. “They are up a few basis points maybe, but earlier today I saw cuts on a couple things more on the shorter stuff. But other stuff I’m looking at out for bid seems to be getting better numbers.”

He added he is not focusing on the primary market today, but keeping attention on the secondary. “All primary issues have brought stuff into the secondary and we’re getting good prices,” he said. “There is nothing in the primary because the structure isn’t quite what we’re looking for so we were hoping new deals would bring out stuff in the secondary and it is.”

Other traders said there was a bid in the secondary market as well. “There’s a bid in the market,” a New York trader said. “So it’s not down, but it’s not up. It’s steady.”

In the primary market, Bank of America Merrill Lynch won the bid for $400 million of Massachusetts general obligation bonds, rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.

Yields ranged from 2.31% with a 4% coupon in 2027 to 2.99% with a 3% coupon in 2030. Bonds maturing between 2031 and 2042 were sold but not available. The bonds are callable at par in 2020.

Citi priced $233.6 million of Allentown, Pa., Neighborhood Improvement Zone Development Authority bonds, rated Baa2 by Moody’s. The first series is comprised of $193.1 million of tax-exempt revenue bonds followed by a second series of $40.5 million of federally taxable bonds. Prices were not available by press time. In the secondary market, trades compiled by data provider Markit showed mixed prices. Yields on New York Liberty Development Corp. 5s of 2043 plunged six basis points to 3.78% while Ohio’s American Municipal Power Inc. 6.27s of 2050 plummeted five basis points to 5.27%.

Yields on Dallas Fort Worth International Airport 5s of 2021 fell three basis points to 2.88%.

Yields on New Jersey’s Tobacco Settlement Financing Corp. 5s of 2041 and Metropolitan Wastewater Reclamation District of Colorado 5s of 2016 rose two basis points each to 6.30% and 0.54%, respectively.

On Tuesday, the slope of the Municipal Market Data triple-A yield curve flattened as yields on the short end rose while yields on the long end fell. The two-year yield increased one basis point to 0.30%, breaking a 42-session streak of trading steady at 0.29%. The 10-year and 30-year MMD yields fell one basis point each to 1.77% and 2.94%, respectively.

Treasuries were stronger for the third session Tuesday. The benchmark 10-year yield fell four basis points to 1.68% while the 30-year yield plunged five basis points to 2.85%. The two-year was steady at 0.27%.

Over the course of September, muni exchange-traded funds have suffered. The iShares S&P National AMT-Free Municipal Bond ETF — ticker MUB — fell 0.08% so far this month. The SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF — ticker SHM — also dropped 0.08%. The PowerShares Insured National Muni Bond ETF — ticker PZA — fell 0.47% since the start of September.

Other popular ETFs, including the Market Vectors High Yield Municipal Index ETF — ticker HYD — fell 0.24% while the Market Vectors Long Municipal Index ETF — ticker MLN — fell 0.39%.

Despite the drops, the muni ETFs outperformed the ProShares Ultra Seven to 10 Year Treasury ETF — ticker UST — which plummeted 1.18% this month.

Most muni ETFs had mixed performance compared to corporate bond ETFs. The iShares iBoxx High Yield Corporate Bond ETF — ticker HYG — fell 0.11%, but the iShares iBoxx Investment Grade Corporate Bond Fund ETF — ticker LQD — increased 0.32%.

In other muni bond news, the Census Bureau reported that state and local tax revenue increased during the second quarter of 2012, a positive sign for the municipal bond industry.

State and local tax revenue rose 3.3% year over year and was up $360.9 billion in the second quarter. Property tax revenues contributed to most of the gains, rising 5.7% year over year, according to IHS Global Insight. This report was the 11th consecutive quarter of year over year gains and over 40% of the gains came from stronger property taxes.

Gregory Daco, a U.S. economist at IHS, is cautiously optimistic. “As the U.S. economy continues to grow at a modest pace, state and local governments’ finances are gradually improving,” he wrote. “Slowly rising wages are pushing up income-tax revenues while an improving housing market is boosting property tax receipts.”

He added that the housing recovering has been gaining momentum recently with home starts increasing and prices rising. “This should continue to support localities for which property taxes represent 70% of total tax revenues,” he wrote.

Still, not all news is good news. While revenue growth is improving, state and local governments will continue to face budget constraints, according to Daco. “States and local governments will continue to face significant challenges in 2013 as demand for public services remains high, federal assistance has dwindled, and revenue growth is modest.”

The impending fiscal cliff is adding worry to state and municipal governments as well. “Indeed, these [governments] may be faced with substantial spending cuts if Congress does not act to avoid the sequester spending cuts scheduled for Jan. 1, 2013 — in particular the non-defense discretionary cuts estimated to be worth about $35 billion in actual outlays.”

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