The tax-exempt market ended Tuesday firmer as new deals in the primary market were priced well and secondary trades were stronger.
“Secondary trading has picked up from yesterday,” a New York trader said. “Yesterday was pretty quiet across the board. There are some offerings out there but I haven’t seen too much execution.”
He added most of Tuesday’s focus was on the primary calendar. “There is larger issuance that is coming out today,” he said. “I heard the Dormitory Authority of the State of New York deal is going well. And that seems to be the focus.”
Concerns over President Obama’s proposed tax hikes in his budget released Monday also pushed muni investors in the safe haven asset.
Traders said munis were rallying Tuesday on fears that taxes will be going up for the rich, forcing money into the tax-free market. “There is a flight to safety,” a second New York trader said, that is spilling over into munis from Treasuries. “With Obama’s budget, people are putting money into munis to avoid a higher tax rate. If he raises taxes on the rich, why not put money into tax-free munis?”
Munis ended firmer Tuesday, according to the Municipal Market Data scale. Yields inside three years were steady while the four-year yield fell two basis points. The five-year yield was steady while yields outside six years declined as much as two basis points.
On Tuesday, the two-year yield held steady at 0.29%, the record low set last Tuesday. The 10-year yield also closed unchanged at 1.83%. The 30-year yield fell two basis points to 3.24%.
Treasuries continued to firm throughout Tuesday. The benchmark 10-year yield and the 30-year yield dropped five basis points each to 1.93% and 3.07%, respectively. The two-year was steady at 0.30%.
In the primary market, Bank of America Merrill Lynch priced for retail and institutional investors $1.8 billion of Puerto Rico Aqueduct and Sewer Authority revenue bonds, rated Baa2 by Moody’s Investors Service, BBB-minus by Standard & Poor’s, and BBB by Fitch Ratings. The institutional order period was pushed up a day and the size of the deal was increased by $550 million due to strong demand.
Yields ranged from 2.20% with 4% and 5% coupons in a split 2015 maturity to 5.30% with a 6% coupon in 2047. The bonds are callable at par in 2022.
Citi priced for retail $834.7 million of DASNY third general resolution revenue state university bonds, rated AA-minus by Standard & Poor’s and Fitch.
Yields ranged from 0.58% with a 3% coupon in 2014 to 3.02% with a 5% coupon in 2027. Credits maturing between 2023 and 2026, and between 2028 and 2030 were not offered for retail. The bonds are callable at par in 2022.
Bank of America Merrill Lynch priced for retail $290 million of Virginia Commonwealth Transportation Board Garvees, rated Aa1 by Moody’s and AA by Standard & Poor’s. Pricing details were not available.
“Without question, the value remains in new issues, which is where the majority are putting capital to work,” said Mark Cantrell, managing director of municipals at Piper Jaffray. “Until the market experiences a prolonged period of substantial supply, it is hard to imagine current yields cheapening very dramatically. Finding relative value has been and appears to remain challenging for the short term.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming.
A dealer sold to a customer Municipal Electric Authority of Georgia 6.637s of 2057 at 5.53%, 10 basis points lower than where they traded last Thursday.
A dealer bought from a customer Tobacco Securitization Authority of Southern California 5.125s of 2046 at 7.65%, eight basis points lower than where they traded Friday.
A dealer sold to a customer Illinois 5.1s of 2033 at 5.46%, five basis points lower than where they traded Thursday.
A dealer purchased from a customer New York Triborough Bridge and Tunnel Authority 5s of 2025 at 2.43%, three basis points lower than where they traded Friday.
While most trades showed firming, some dealers were quietly moving in the opposite direction. “There are some people cutting bonds pretty good to move them,” the second New York trader said Tuesday late afternoon. “Very quietly.”
He added the rally is “not as strong as people think right now and people want to get light.”
Since the most recent rally began last Friday, muni-to-Treasury ratios have increased on the long end as munis underperformed Treasuries and became cheaper. The 10-year muni-to-Treasury ratio rose to 92% from 91.7% last Thursday. The 30-year ratio increased slightly to 103.8% from 103.1%.
Muni-to-Treasury ratios on the short end fell as munis outperformed Treasuries. The five-year ratio fell to 78.6% from 79.1% on Thursday.