Triple-A general obligation bonds reached the most expensive level relative to Treasuries since 2011 as munis outperformed government bonds following signs of a pause in tension between Ukraine and Russia.
Yields on 10-year AAA-rated GOs were 31 basis points lower than those on Treasuries maturing in the same year, according to Thomson Reuters data, the most negative spread since July 25, 2011. The ratio of triple A yields to Treasury yields is 0.88%, the lowest since May 24, 2013.
New municipal bond issuance was met with high demand Tuesday as a market starved for fresh bonds remained mostly steady as concerns over geopolitical drama in Eastern Europe faded.
Municipal yields were steady to somewhat weaker, even as Treasury yields shot up following a speech by Vladimir Putin in which the Russian president indicated he wouldn't be escalating an invasion of Ukraine. Equity markets were roiled earlier in the week as Russian troops began to seize the Crimean peninsula, driving up the value of less risky investments like government bonds.
"It was scary for everybody yesterday and the more we knew about it the more it was mostly a temporary thing," one trader in New York said about the market's reaction to the events overseas. "It definitely reversed Treasuries today but we don't have any supply pressure in munis."
Strong demand for new-issue bonds enabled the municipal market to outperform Treasuries Tuesday, traders and analyst said. Yields on munis rose as much as two basis points, according to Municipal Market Advisors, while Treasury yields jumped as much nine basis points.
"You can look at the treasuries, and because the crisis in the Ukraine eased a bit we haven't seen the flight to quality that we saw yesterday," Bernard Garruppo, chief executive officer of New Jersey-based Granite Springs Asset Management, said in an interview.
Investors began to calm down about the situation as soon as markets opened Tuesday, Janney Capital Markets said in a report Tuesday.
"Shortly after US trading opened, a number of geopolitical think tanks and research outfits published notes commenting that global powers would work to de-escalate the Ukraine tensions," Guy LeBas, chief fixed income strategist at Janney, wrote in the report.
Signs of a strengthening economy in the U.S. also gave investors faith in riskier assets, LeBas said.
"Those notes along with a round of decent domestic economic data helped calm the initial market storm," LeBas said, "leaving risk assets to bounce back off of their lows and the safe haven bid for Treasuries to fade slightly."
Even as some of the week's sizeable deals entered the market Tuesday, participants said the bonds weren't enough to satiate buyers who have long been without investing opportunities in the primary market.
"They have so much cash and they love the new issue product," so the new deals were taken up quickly, the New York-based trader said.
Observers said most municipal bond buyers are sitting on cash from coupon payments and redemptions, waiting for attractive yields to show up in the primary market. Bonds that came to the market Tuesday morning were afforded lower yields in afternoon repricings.
This week marks the first time prospective issuance has been greater than $5 billion since January, with two deals offering more than $500 million of bonds. One of those deals, $650 million of New York City general obligation bonds, held a second retail order period Tuesday in which yields on the bonds tightened.
The yield on 3%-coupon bonds maturing in 2017 fell three basis points to 0.56%, while bonds maturing in 2039 were changed from a 4.25% coupon with a 4.3% yield to a 4% coupon with a 4.25% yield.
Also in the negotiated market, New Jersey and Missouri issuers each brought deals greater than $100 million.
The New Jersey Educational Facilities issued and repriced $190.14 million of revenue bonds on behalf of Montclair State University with Barclays Capital as lead underwriter. The yields ranged from 0.35% with a 3% coupon maturing in 2016, to 4.21% with a 5% coupon for bonds maturing in 2044.
The bonds, callable at par in 2024, are rated A1 by Moody's Investors Service and AA-minus by Fitch Ratings.
The School District of Springfield Missouri is issuing $109.23 million, $26.65 million of which will be school building bonds and $82.575 million are refunding bonds. The managing underwriter is George K. Baum & Company, and the bonds earned a AA-plus rating from Standard & Poor.
In the competitive market, Kentucky issued a three-part deal Tuesday totaling $243.9 million. By press time, Morgan Stanley had won the bid of $10.1 million of taxable bonds, while Bank of America Merrill Lynch was awarded $38.3 million of general receipt bonds.
JP Morgan was the leading bidder on the remaining $195.4 million of bonds.
Yields on those bonds ranged from 0.30% with a 4% coupon maturing in 2015 to 4.15% with a 4% coupon maturing in 2044. Ten-year bonds maturing in 2024 with a 5% coupon were sold at 2.57%.
Treasury yields softened Tuesday, with the 10-year yield gaining nine basis points to 2.70%, while the 30-year yield climbed eight basis points to 3.64%. The two-year yield was up one basis point to 0.34%.
Yields on short-term bonds in the muni market were steady by market close Tuesday, according to Municipal Market Advisors and Municipal Market Data, while those with maturities beyond 2024 gained one to two basis points.
