NEW YORK – Dealers just can’t seem to get enough of munis.
Activity was higher than expected for most of Thursday’s trading session. Although most market participants assumed the week between Christmas and New Year’s would be dead, there is a surprising amount of activity in muni land as traders said not everyone has closed up shop for the year.
And the activity pushed the 10-year muni yield down one basis point to 1.86% to set a new record low as recorded by Municipal Market Data.
“You have a lot of cash coming in during December for coupon payments and the like,” said a trader in New Jersey. “And there is an anticipated stream in January, so there’s a lot of cash that is available at this point of time and issuance is down. So that has put pressure on muni prices which means a lowering in yields.”
Ahead of January reinvestment money, dealers are hoarding short-term bonds and waiting to sell them after Jan. 1 when demand spikes. A trader in New York said he is seeing a lot of buyers in the 2016 range.
“Dealers will sometimes play that card,” he said. “They will go in ahead of the money. Load up on it. And then stock it away and not offer it until January and then mark it up and sell it to customers.”
Munis were firmer Thursday, according to the MMD scale. Yields inside the three-year were steady while the four-year yield fell two basis points. The five-year yield dropped three basis points. The six-year to 15-year yield fell one basis point and yields outside the 26-year closed down two basis points.
On Thursday, the 10-year muni yield fell one basis point to 1.86%, breaking the previous record of 1.87% set Wednesday and the prior 1.91% record set the week before Christmas.
The two-year yield closed flat at 0.36% for its 16th consecutive trading session. The 30-year yield dropped two basis points to 3.56%.
Treasuries firmed Thursday. The benchmark 10-year yield fell three basis points to 1.90% and the 30-year yield fell one basis point to 2.91%. The two-year yield held steady at 0.28%.
Bank of America Merrill Lynch won the bid for $299.5 million of Municipal Electric Authority of Georgia revenue bonds.
The first series consists of $100.73 million of taxable power revenue bonds, rated A-plus by Standard & Poor’s and Fitch Ratings. Yields ranged from a 1.58% coupon priced at par in 2013 to a 4.98% coupon priced at par in 2028.
The second series consists of $57.98 million of taxable general power revenue bonds, rated A-plus by Standard & Poor’s and Fitch. Yields ranged from a 1.58% coupon in 2013 to a 4.98% coupon in 2028.
The third series consists of $59.53 of taxable project one subordinated bonds, rated A by Standard & Poor’s and A-plus by Fitch. The bonds were priced at par to yield 4.03% in 2020 and 4.43% in 2022.
The fourth series consists of $81.24 million of general resolution projects subordinated bonds, rated A by Standard & Poor’s and A-plus by Fitch. Yields ranged from a 3.52% coupon priced at par in 2018 to a 4.43% coupon priced at par in 2022.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming.
A dealer sold to a customer Commonwealth of Puerto Rico 5s of 2023 at 5.03%, 11 basis points lower than where they traded last week.
A dealer bought from a customer New York City Municipal Water Finance Authority 5s of 2034 at 3.85%, 11 basis points lower than where they traded the prior week.
Another dealer sold to a customer Hudson Yards Infrastructure Corp. 5.25s of 2047 at 4.80%, eight basis points lower than where they traded the previous week.
Bonds from an interdealer trade of Washoe County, Nev., 5s of 2024 yielded 3.41%, six basis points lower than where they traded Wednesday.
When looking at where muni bonds might be headed in the future, Schroders Investment Management says positive factors outweigh the negatives. In 2011, most states balanced budgets by cutting spending or increasing revenue and are expected to continue balancing budgets into 2012.
In the past, states solved budget gaps by making short term changes, and avoided long term structural changes. States would put workers on furlough instead of permanently firing them, or assume they would get federal aid and draw down on reserves, for example.
This year, states made lasting, meaningful cuts as opposed to short-term, one time gains, according to Eric Friedland, head of municipal research at Schroders. States reduced head count, negotiated labor concession, and increased multi-year taxes.
“States have solved budget gaps by taking long term meaningful cuts,” he said. “And no one expected them to do that.”
Headwinds still exist for muni issuers going into 2012. The housing market remains weak, which has a lagging negative impact on local governments, and lowers property tax revenues. Pensions and post-retirement employee benefits will continue to be a negative driver for local governments.
Due in part to all these factors combined, Friedland expects the essential service revenue sectors, including public power, water, and sewer utilities, to offer credit stability in a low growth rate environment. “These sectors benefit from having a monopolistic service, the ability to increase rates autonomously, and being able to pledge a defined revenue stream with protective covenants to bondholders,” he said.
“They have protective covenants and a revenue source that you don’t see with general obligation bonds,” he added. “They isolate the investors from potential bad policy decisions a government may make.”
Friedland recommends being more picky in the healthcare sector. “Those positioned best are the state-wide systems that have good market position, a multi site system with vertical integration, physicians that are aligned with hospitals, and hospitals that are set up to handle larger volume.”
“There are winners and losers but we are picking those that we think are strong and are trading cheap,” Friedland said. “The sector is painted with a very wide brush. So a lot of investors stay away from all hospitals. We try to come in and pick up the better ones. And find the gems in the sector that are perceived as weak.”
In economic news, seasonally adjusted jobless claims rose to 381,000 for the week ending Dec. 24, a 15,000 gain from the previous week’s 366,000, the Labor Department said. The initial claims were higher than the median 375,000 expected by economists.
“The unemployment claims data continue to signal that the pace of improvement in the labor market may be gaining momentum,” wrote economists at RDQ Economics. “For seven consecutive weeks, the four-week average of claims has been below the 400,000 mark. Given the decline in the savings rate in recent months, stronger job creation is vitally important for the U.S. consumer and from this and other indications, it appears this improved jobs picture may be falling into place at the end of 2011.”
In other economic news, pending home sales surged 7.3% to a 100.1 reading in November, the highest level in 19 months, according to the National Association of Realtors. The surge came after an unrevised 10.4% increase to 93.3 in October. The figures beat expectations; economists had predicted a 2.0% increase.
“Indeed, the broader theme is one of a gradually improving U.S. housing market,” wrote Robert Kavcic of BMO Capital Markets Economics. “The months’ supply of homes for sale in the new and existing markets has come back down to more normal levels, mortgage lending standards have stabilized in recent quarters, and a gradually improving labour market should lend further support.”
