The tax-exempt market struggled Tuesday, as the primary market was not interesting enough to jump-start the muni market.
Yields on the long end appeared to hit a wall as buyers were not enticed by the record low yields and demanded higher yields in order to participate.
“Business is over if rates continue to be this low,” a New York trader said. “Business is tough. There are not a lot of happy people.”
Other traders noted municipals were very quiet. “Munis have been asleep the last two days,” a Chicago trader said. “It’s a typical environment. When yields get lower and lower, buyers take a break and see what new issues are doing. Then when they are allocated new issues, they put some bonds to work in the secondary on Thursday, then go home for the weekend. It’s the same case every week.”
The muni yield curve steepened, with yields on short end falling and yields on the long end rising, according to the Municipal Market Data scale. Yields inside seven years were steady to one basis point lower, while yields outside eight years were steady to one or two basis points higher.
On Tuesday, the 10-year yield rose one basis point to 1.74%, closing seven basis points above its record low of 1.67% set Jan. 18. The 30-year yield increased two basis points to 3.07%, finishing up from the 3.05% record low as recorded by MMD on Monday. The two-year yield remained steady at 0.31% for the 20th consecutive trading session.
The Treasury market had the opposite reaction as the yield curve flattened. The two-year yield jumped two basis points to 0.29%. The benchmark 10-year yield fell two basis points to 1.77%, while the 30-year yield dropped three basis points to 2.92%.
In the primary market, Morgan Stanley repriced for institutions $503.8 million of New York State Environmental Facilities Corp. clean water and drinking water bonds for the New York City Municipal Water Finance Authority, following a retail order period Monday. The bonds are rated Aaa by Moody’s Investors Service, AAA by Standard & Poor’s and AA-plus by Fitch Ratings.
Yields ranged from 0.29% with a 2% coupon in 2014 to 3% priced at par in 2029. Credits maturing in 2013 were offered via sealed bid. The bonds are callable at par in 2022. Yields were lowered as much as four basis points on maturities inside 2024, but raised as much as three basis points on maturities outside 2025.
Bank of America Merrill Lynch priced $177 million of Connecticut Housing Finance Authority housing mortgage finance program bonds, rated triple-A.
Yields on the first series, $106.8 million, ranged from 2.90% priced at par in 2024 to 3.875% priced at par in 2038. The bonds are callable at par in 2021.
Yields on the second series, $70.2 million subject to the alternative minimum tax, ranged from 2% priced at par in 2017 to 3.50% priced at par in 2024. The bonds are callable at par in 2021.
In competitive deals, Citi won the bid for $238.8 million of Seattle water revenue bonds, rated Aa1 by Moody’s and AA-plus by Standard & Poor’s. Yields ranged from 0.87% with a 5% coupon in 2017 to 3.30% with a 4% coupon in 2034. Credits maturing between 2012 and 2016 were not formally re-offered. The bonds are callable at par in 2022.
In the secondary market, a sample of CUSIP numbers compiled by data provider Markit showed a mix of stronger and weaker trades.
Yields on Boston 4s of 2025 rose three basis points to 2.52% while Georgia State Road and Tollway Authority 5s of 2022 rose two basis points to 1.88%.
Other trades were stronger. Yields on New York City MWFA 5.882s of 2044 and Nassau County 5s of 2020 each fell two basis points to 4.02% and 2.16%, respectively.
Elsewhere in the secondary market, trades reported by the Municipal Securities Rulemaking Board were mostly firmer.
Bonds from an interdealer trade of Illinois 5s of 2027 yielded 3.23%, 50 basis points lower than where they traded last Thursday. Bonds from another interdealer trade of North Texas Tollway Authority 8.91s of 2030 yielded 6.40%, 22 basis points lower than where they traded Friday.
A dealer sold to a customer Wayne County, Mich., 3s of 2013 at 2.30%, 12 basis points lower than where they traded Monday. A dealer bought from a customer Illinois taxable 4.421s of 2015 at 2.28%, six basis points lower than where they traded Monday.
With the 30-year muni yield continuing to set a new record low yield this week, analysts at Citi say the demand side has clearly outpaced supply.
“The demand side factors appear to continue to dominate, including heavy bond calls and maturities which may keep net supply in negative territory, an ongoing hunger for yield from investors with massive cash-near cash yielding close to zero, too-short average maturities in existing portfolios, and strong institutional demand,” wrote George Friedlander, senior municipal strategist at the firm.
“It is becoming increasingly difficult to find extra value anywhere in the market, and yet it is also difficult to make the case that yields will rebound significantly any time soon,” he said. “Investors should buy into any weakness, when and if it occurs.”