An “aggressively priced” retail offering for $1.8 billion of California general obligation bonds and rallying Treasury yields led the municipal market into firmer territory at the middle and long ends of the curve Monday.
The Cal bonds, rated A1 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch Ratings, are expected to drive the market this week, a trader in California said.
Yields ranged from 1.15% with coupons of 3% and 4% in 2014 to 4.87% with coupons of 4.75% and 5% in 2041. Debt maturing in 2025, 2027, 2028, and 2029 were not offered to retail.
Goldman, Sachs & Co. led 28 other firms when it priced the $1.8 billion sale for retail. A second retail offering is expected Tuesday, followed by an institutional period Wednesday.
“Cals will set the tone,” he said. “Everyone’s holding back a little until we see what kind of reception we’re going to get on them.”
Tax-exempt yields ended Monday firmer across all but the front end of the curve. They were steady through five years, according to the Municipal Market Data scale.
Yields from six to 10 years fell two or three basis points. Those from 11 to 17 years decreased three to five basis points. Beyond 17 years, they dipped one or two basis points.
The benchmark 10-year muni yield lost three basis points Monday to 2.53%. It still sits 56 basis points above the record low it held on Sept. 23.
The 30-year yield inched down one basis point to 3.71%.
The two-year yield held steady at 0.45% for a fourth straight session.
Treasury yields ended the day mostly lower, particularly from the belly of the curve on out.
The benchmark 10-year Treasury yield dropped eight basis points to 2.17%.
The 30-year plunged nine basis points on the day to 3.14%.
The two-year yield has held steady at 0.27%.
The secondary market is in a better position to start the week, according to a trader in New York. There was a bottoming out of the secondary midway through last week, with somewhat of a continuation Thursday and Friday.
“Some of the syndicate positions that were overhanging in the market were able to get cleared away, granted at cheaper prices. But at least they’re out of the way. The Street’s in a lot better shape going into this week than it was going into last week.”
The industry estimates the municipal bond market should see an expected $6.7 billion in new issuance this week. Last week’s number was revised downward to $4.5 billion.
Three deals in particular are expected to provide a large block of the volume.
“It’s good to see some issuance back in the market,” a second New York trader said. “In the long run, it’ll be healthy for the market to get a little backup in here.”
The past couple of weeks have seen mixed results with all of the new volume, he said.
Last week’s offerings did fairly well and traded well afterwards, the trader added. But the week before that was a very difficult one.
The supply loosens up some of the bonds that are being held by institutions. This, in turn, offers a chance for more bonds to come into play in the secondary, he explained.
Considering the concessions underwriters have made in the primary market over the past couple of weeks, retail offering prices for the California GOs were something of a surprise, according to MMD analyst Randy Smolik.
Yields weighed in at plus-75 basis points to MMD at 2016, plus-95 basis points at 2021, plus-115 basis points at 2026, and plus-115 basis points at 2041.
“These were not the concessions that we had grown accustomed to from last week’s hefty negotiated schedule,” Smolik wrote in a research post.
The recent backup in yields, and general yield-oriented calendar, should encourage buyers to put capital to work this week, according to JPMorgan muni analyst Peter DeGroot.
This week’s tax-exempt supply shows a substantial spread product, including the two largest deals, the California GOs and JPMorgan expected pricing of $1 billion of New York City’s Hudson Yards Infrastructure Corp. fiscal 2012 Series A senior revenue bonds.
“These deals should see solid demand, despite their size, given the need to enhance returns in the low yield environment,” DeGroot wrote in a recent research report.
“We expect the market will have strong demand for A-rated bonds across the curve as these bonds produce solid returns in a stable rate environment and provide some cushion against rising interest rates,” he added.
Furthermore, taxable-based bond investors see something they like in the total returns of tax-exempts in the intermediate range, DeGroot added.
Munis are around their cheapest levels against corporate bonds in the seven- to 10-year range, he added.
And crossover buyers might be interested in munis of the same range for developing strategies to outperform corporate bonds with similar structures.
Since Build America Bonds made taxable-based buyers more comfortable with muni credit, DeGroot said, cross-allocation strategies of this kind have become more widespread.
The equities markets struggled unsuccessfully to dig themselves out of early holes. The main indexes were down on the day by at least 1.94%. The Dow Jones Industrial Average finished the day’s session down 247 points.
In economic news, the Federal Reserve reported Monday that industrial production increased 0.2% in September.
The number for August, which had previously been reported as a 0.2% gain, was revised to a flat level.