Investors Clamor for Flood of New Supply

The municipal market served up a hot feast Tuesday as a banquet of new supply met a hungry investor base that’s flush with reinvestment cash and anxious to buy before the primary goes on holiday.

And the subsequent feeding frenzy didn’t let up until the benchmark muni yield fell below its Treasury equivalent for the first time in more than three months.

Traders, as they have for the most part since the month began, saw a favorable muni environment.

The market saw improvement in municipal prices on the day, according to a trader in New Jersey.

“We’re not following Treasuries at all,” the trader said. “You still have big rollover in December and January, and you don’t have enough bonds coming into the market. And as these bonds are being placed, I’m not seeing a lot of bonds coming into the secondary market, as a result.”

Muni yields plummeted steadily throughout Tuesday’s session, according to the Municipal Market Data scale. They were unchanged at the two-year mark, and two and four basis points firmer through five years.

After that point, they fell between five and 10 basis points. The lowest descent occurred in the belly of the curve, in the six- to 14-year range, where they were down between eight and 10 basis points.

The benchmark 10-year yield plunged 10 basis points Tuesday to 2.07%. This lowered its ratio to Treasuries, to 99.51% from 106.37%, below 100% for the first time since Aug. 24. It now sits closer to the 2011 calendar-year average of 97.24%.

The two-year yield held steady at 0.39% for a fourth consecutive session. The 30-year yield dropped 5 basis points to 3.76%.

“There’s a better bid that’s creeping into the market on quality paper,” the New Jersey trader said. “People are trying to position themselves. They know they’re going to need the product, and they’re not afraid when they see the Treasury going down.”

While muni yields tumbled, those for Treasuries remained a bit weaker. The benchmark 10-year yield rose four basis points to 2.08%.

The two-year yield ended flat at 0.26%. The 30-year yield climbed five basis points to 3.08%.

But while institutional accounts have been putting their money to work wherever they could, of late, retail investors have been fairly quiet on the long end, the trader said.

“They’re looking to get paid for taking risk and going out on the long end,” he said. “And in a low interest rate environment like today, I don’t think a lot of these people feel they’re getting paid to go out and buy a 40-year bond right now.”

Primary market volume is expected to hover around the $6 billion range this week.

Industry estimates for anticipated market volume total $5.82 billion, versus a revised $5.88 billion last week. No particularly large bond deals are expected.

The week’s biggest debt deal involved the short-term market, where eight banks, led by Wells Fargo Securities, won $2.15 billion of New Jersey tax and revenue anticipation notes.

The notes, which carried a 2.00% coupon, were rated MIG-1 by Moody’s Investors Service, SP-1-plus by Standard & Poor’s, and F1-plus by Fitch Ratings.

Among the largest underwriters, Wells Fargo won $1.1 billion of notes in four series with effective rates ranging between 0.248% and 0.272%.

Barclays Capital won $300 million of notes in three series with effective rates ranging between 0.233% and 0.252%.

Bank of America Merrill Lynch won $300 million of notes in three series with effective rates ranging between 0.219% and 0.268%.

In the long-term negotiated market, Morgan Stanley led 20 other underwriters to price $550 million of New York City Transitional Finance Authority building aid revenue bonds.

The bonds were rated Aa3 by Moody’s and AA-minus by Standard & Poor’s and Fitch.

Yields range from 0.90% with coupons of 2.00% and 4.00% in a split maturity in 2014 to 4.50% priced at par in 2041. Debt maturing in 2013 was offered in a sealed bid.

Yields in the three-year, five-year and 30-year ranges fell two and three basis points from those offered for the second day of retail pricing. The 10-year yield came in 10 basis points lower.

The deal was originally set for a second day of retail pricing Tuesday, but the institutional order period was accelerated, as a number of market participants suspected.

“They bumped in a few spots,” a second trader from New Jersey said. “And they’re probably going to accelerate the institutional order period into the afternoon, instead of waiting for tomorrow.”

JPMorgan priced for retail $159.4 million of Oklahoma Turnpike Authority system second senior revenue bonds. The bonds are rated Aa3 by Moody’s and AA-minus by Standard & Poor’s and Fitch.

Yields range from 0.76% with a 3.00% coupon in 2014 to 4.01% with a 4.00% coupon in 2031. Credits maturing in 2027, and split maturities in 2025, 2026, and 2028 through 2030 were not offered to retail.

In the competitive space, JPMorgan won $299.2 million of New York State Series 2011E tax-exempt general obligation bonds.

The bonds are rated Aa2 by Moody’s and AA by Standard & Poor’s and Fitch.

Yields range from 0.42% with a 4.00% coupon in 2013 to 4.25% priced at par in 2041. Debt maturing in 2012 was not reoffered.

JPMorgan also won $138.3 million of Wisconsin GOs of 2011, Series C.

The bonds are rated Aa2 by Moody’s and AA by Standard & Poor’s and Fitch.

Yields range from 2.57% with a 5.00% coupon in 2023 to 4.05% with a 4.00% coupon in 2032.

Bank of America Merrill Lynch won $278.1 million of Board of Regents of the University of Houston System consolidated revenue and refunding bonds. The bonds are rated Aa2 by Moody’s and AA-minus by Standard & Poor’s.

Yields range from 0.30% with a 2.00% coupon in 2013 to 4.10% with a 5.00% coupon in 2043. Debt maturing in 2014 through 2020, 2022 through 2026, 2030, and 2032 through 2034 is sold, but not available.

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