The severe scarcity of issuance in the municipal market trumped news from the Federal Reserve Wednesday in providing direction for muni yields.
In fact, tax-exempt yields ignored the announcement of a retention of the status quo made by the Federal Open Market Committee and extended their rally into an 11th day. The Fed news also failed to energize trading in munis, which cooled off after an active opening.
Traders correctly anticipated the FOMC would hold to its present course. But some were surprised when activity didn’t pick up immediately after the statement, as it sometimes does.
“Prices just weren’t getting there,” a trader in New York said. “It’s tough to say if we’re weaker or stronger now. If you go in to buy a bond, you’re getting roughly two basis points or so out of them, probably just to get a trade done and not because the market is demanding it.”
The rally continued as muni yields reached an 11th straight day of firming, according to Municipal Market Data’s triple-A scale. Short-term yields were flat to two basis points lower. Intermediate yields fell one basis point, and long-term maturities slipped two basis points.
The benchmark 10-year muni yield trickled down a basis point to 2.91%. That makes for a 36 basis point drop from April 11, when the 10-year yield was 3.27%. The rally, though, continues to make up for earlier losses. However, the benchmark yield sits right on top of its nadir for the year of 2.90%, reached on March 16.
After holding for five straight days, the two-year muni yield firmed two basis points to 0.58%. The 30-year yield ended two basis points lower at 4.61%.
As it has been all year, inventory is the crucial factor, traders said. And with little liquidity, many worry about replacing anything they trade.
Views across the industry have been changing about the amount of issue supply to come, George Friedlander, a muni analyst with Citi, wrote in a recent market commentary.
“It appears that more market participants are beginning to believe that at least a portion of the drop in volume may represent a structural change in attitude about borrowing for new projects, rather than merely a delay in issuance,” he wrote.
Chris Mauro, head of U.S. municipals strategy at RBC Capital Markets, wrote in a recent market commentary that the combination of 26 new governors and the national call for fiscal austerity will likely keep municipal issuance from reverting to the mean this year as many had anticipated.
One trader in New Jersey agreed that the lack of issuance was the new normal, “until municipalities, state governments, and the federal government get on a little more stable financial footing.”
When 2011 closes, he predicted, the market will have seen the smallest issuance in municipal debt in more than 20 years. “Every year gets more and more new issues,” he said. “This year, obviously, the presses stopped printing.”
Predictions for the year, once commonly above $400 billion, have plummeted. The most recent estimates range from $200 billion to $300 billion.
Traders said that while some new supply has arrived this week, it is “not enough.”
In the new-issue market Wednesday, Morgan Stanley priced for retail investors $172.8 million of taxable debt for the Municipal Electric Authority of Georgia. The bonds are rated A2 by Moody’s Investors Service, A by Standard & Poor’s, and A-plus by Fitch Ratings.
The deal was broken into two sets of three series: Project One subordinated bonds Series 2011 A, B, and C, and general resolution project-subordinated bonds Series 2011 A, B, and C.
For the Project One bonds, the $79.9 million Series A has yields ranging from 1.35% in 2013 to 4.17% in 2021. Series B, $30.2 million, has yields ranging from 1.78% in 2014 to 4.02% in 2021. Taxable Series C, $1.05 million, will be sold by sealed bid and mature in 2013.
For the general resolution project debt, the $5.62 million Series A, which matures in 2021, was not offered to retail investors. Series B, $54.2 million, has yields ranging from 1.78% in 2014 to 4.17% in 2041. Series C, $1.86 million, will be sold by sealed bid and mature in 2014.
Also, Morgan Stanley priced for institutions a $260 million sale of Series A revenue bonds for the Massachusetts Development Finance Agency on behalf of the Broad Institute.
Yields have changed since Tuesday’s retail pricing. Institutions were offered yields ranging from 3.72% in 2021 to 5.37% in 2037 and 5.45% in 2041. Yields for retail ranged from 3.58% in 2020 to 5.02% in 2031. Bonds maturing from 2036 through 2041 weren’t offered during the retail period.
The bonds are rated A1 by Moody’s and AA-minus by Standard & Poor’s.
Volume is expected to rise this week to $3.05 billion, according to The Bond Buyer and Ipreo LLC. That represents a 48% rise from last week, when just $2.06 billion came to market. Issuance averaged $3 billion in the first quarter, far below the $8 billion floated weekly in 2010.
A couple of large deals Tuesday boosted supply, including the biggest tax-exempt offering so far this year. Investors eagerly grabbed Chicago’s O’Hare International Airport offering. Citi had opened with a retail order period on a portion of the $1 billion of third-lien revenue bonds, which will finance projects under an ongoing $8 billion runway-expansion program. The institutional offering was originally scheduled for Wednesday, but healthy appetite moved pricing up a day.
The O’Hare deal “met with solid demand benefiting from a strong market and little competing supply, with some shorter maturities repriced to lower yields, and the 30-year pricing as 6%,” Alan Schankel, managing director at Janney Capital Markets, wrote in its daily commentary.
The Treasury market saw weakness across the curve Wednesday after a period of firming late Tuesday.
The two-year yield rose three basis points on the day to 0.65%. The 10-year yield climbed five basis points to 3.36% and the 30-year yield jumped seven basis points to 4.46%.