The tax-exempt market was stronger Wednesday, following Treasuries, as industrial production failed to meet expectations and more fears out of Greece pushed investors into safe-haven assets. Response to the minutes of the Federal Open Market Committee Wednesday afternoon was muted.
“We have a very good tone in the market,” a Los Angeles trader said. “We are pricing some deals out here and getting really strong indications.” One of the deals he is bringing to market in California is oversubscribed due to retail demand.
There is no supply, so demand is hot. “The supply and demand factor is overwhelming everything else,” he said. “With the Municipal Market Data scale stable the past few days, people believe in these rates more.”
The front end is much more aggressive than the long end. “People are more picky locking in money for 30 years,” he said.
“It’s a good time to be a seller,” he said. He is pricing a triple-B deal next week that he is already getting calls for, but sees double-A rated bonds “going out like crazy.” The sweet spot is a 10-year double-A rated bond. “If you have a 10-year double-A rated bond, come to market right now,” he said.
Munis were firmer in the afternoon after looking hesitant in the morning. They are “wishy-washy,” a New York trader said earlier in the day. “Munis are going both ways. You still have guys looking to lighten up, but they aren’t running towards the exit.”
Munis were firmer on the long end Wednesday, according to the MMD scale. Yields inside 21 years were steady while yields outside 22 years fell as much as three basis points.
On Wednesday, 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% for its fourth consecutive trading session. The 30-year yield fell three basis points to 3.21%.
Treasuries were choppy throughout Wednesday and the yield curve steepened. The two-year yield fell two basis points to 0.28%. The benchmark 10-year yield was steady at 1.93%, closing below 2.00% for the fourth consecutive trading session. The 30-year yield rose two basis points to 3.09%.
In the primary market, the top two biggest deals of the week were priced Tuesday, a day earlier than expected, due to strong demand.
On Wednesday, JPMorgan priced for institutions $450.7 million of Tennessee general obligation bonds following a retail pricing Tuesday. The bonds are rated Aaa by Moody’s Investors Service, AA-plus by Standard & Poor’s, and AAA by Fitch Ratings.
Yields ranged from 0.54% with a 3% coupon in 2015 to 2.41% with a 5% coupon in 2027. The bonds are callable at par in 2022.
Bank of America Merrill Lynch priced for institutions $292.5 million of Virginia Commonwealth Transportation Board Garvees following retail pricing Tuesday. The credit is rated by Moody’s and AA by Standard & Poor’s.
Yields ranged from 0.27% with a 2% coupon in 2013 to 2.65% and 2.80% with 5% and 2.625% coupons in a split 2027 maturity. The bonds are callable at par in 2022.
Morgan Stanley priced $169.6 million of Arizona Water Infrastructure Finance Authority bonds, rated triple-A by all three rating agencies.
Yields ranged from 1.20% with a 4% coupon in 2018 to 2.38% with a 5% coupon in 2025. The bonds are callable at par in 2022.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming all week.
A dealer sold to a customer Illinois 6.725s of 2035 at 5.80%, eight basis points lower than where they traded last Friday.
Bonds from an interdealer trade of Massachusetts State College Building Authority 5s of 2029 yielded 2.76%, five basis points lower than where they traded Monday.
Bonds from another interdealer trade of Port Authority of New York and New Jersey 5.647s of 2040 yielded 4.40%, five basis points lower than where they traded Tuesday.
Bonds from an interdealer trade of Lynwood, Wash., 4s of 2037 yielded 4.06%, one basis point lower than where they traded Tuesday.
Since the most recent rally began last Friday, muni-to-Treasury ratios have increased as munis underperformed Treasuries and became cheaper. The 10-year muni-to-Treasury ratio rose to 95.3% on Tuesday from 91.7% last Thursday. The 30-year ratio increased slightly to 105.9% from 103.1%. The five-year ratio rose to 81.5% from 79.1% on Thursday.
Citi analysts agree with traders that retail buying has returned. “Direct retail buying has rebounded modestly, but is still down from the heavy buying that occurred prior to the sharp drop in muni yields since late December,” wrote George Friedlander. “For the buying that does occur, however, we are seeing more willingness to extend along the curve or to reduce required ratings, as investors become more and hungrier for yield. The result has been a continuing decline in credit spreads.”
The two-year and 10-year spreads have tightened. Spreads between the two-year triple-A muni and two-year triple-B muni have tightened to 146 basis points on Tuesday from 158 at the beginning of the year.
The spread between the 10-year triple-A muni and triple-B muni has tightened to 199 basis points on Tuesday from 203 basis points at the start of the year.
The spread on the long end has been more mixed. Spreads between the 30-year triple-A muni and the triple-B muni started a 162 basis points and tightening to 153 basis points mid-January before widening back out to 163 basis points on Tuesday.