The tax-exempt market ended steady Tuesday, continuing a 17-session streak of steady to firmer munis.
Yields on municipal bonds remained unchanged for the day even as one of the week’s largest deals came to market and Treasuries weakened.
The Dormitory Authority of the State of New York deal priced in the primary set the tone for the day. “That deal is going well,” a New York trader said. “I don’t think the market is much stronger but that deal is going well.”
JPMorgan won the bid for $1.1 billion of DASNY personal income tax revenue bonds, in what is expected to be one of the largest deals of the week. The credit is rated AAA by Standard & Poor’s and AA by Fitch Ratings.
Yields ranged from 0.51% with a 5% coupon in 2015 to 3.20% with a 5% coupon in 2042. Credits maturing in 2014, 2016, and 2017 were not formally re-offered. The bonds are callable at par in 2022.
Elsewhere in the primary market, Jefferies & Co. priced $181 million of Jacksonville Electric Authority water and sewer bonds. Prices were not available by press time.
As pricing of the week’s new deals got off to a start, munis were steady, according to the Municipal Market Data scale. On Tuesday, the two-year yield closed flat at 0.31%. The 10-year yield finished steady at 1.73%, remaining six basis points above its record low of 1.67% set Jan. 18. The 30-year yield closed flat at its record low of 2.92%.
Since June 22, munis have traded steady or firmer, holding a 17-session streak of steady to lower yields. Over that time, the 10-year yield has dropped 13 basis points while the 30-year yield has plunged 24 basis points.
Treasuries were weaker after Federal Reserve Chairman Ben Bernanke’s testimony semi-annual monetary policy report to Congress. The benchmark 10-year yield and the 30-year yield each jumped three basis points to 1.50% and 2.59%, respectively. The two-year yield increased two basis points to 0.25%. Still, yields remained near their record lows.
In late morning trading, fixed income participants turned their attention to Bernanke’s comments, although most analysts agreed reaction was muted.
“Bernanke stressed that the Fed stands ready to take further action to support the recovery should it falter,” wrote Paul Edelstein, director of financial economics at IHS Global Insight. “But this has been his stance for quite a while. So there was nothing new in him saying so this time.”
Edelstein noted Bernanke’s comments on the economy were gloomier than previous testimonies, but are still too optimistic. “We believe that, despite the recent downgrade to the Fed’s outlook, it remains too optimistic on growth prospects, job creation, and inflation stability. As such, we expect the Fed to downgrade its forecasts again and initiate another round of quantitative easing by the end of the year.”
In the secondary market, trades compiled by data provider Markit showed firming. Yields on California’s Inland Empire Tobacco Securitization Authority 4.625s of 2021 and Austin Water and Wastewater System 5s of 2042 each dropped two basis points to 6.01% and 3.28%.
Yields on Tennessee Energy Acquisition Corp. 5s of 2027 and Orange County, Calif., Sanitation District 4s of 2033 each fell one basis point to 4.69% and 2.98%. Yields on New York State Tollway Authority 5s of 2025 and Dekalb County, Ga., Water and Sewer Department 5.25s of 2025 each fell one basis point to 2.78% and 2.66%.
Since munis began their steady climb on June 22, muni-to-Treasury ratios have risen as the muni rally lagged the Treasury rally. Munis underperformed their taxable counterparts and became relatively cheaper.
The five-year ratio jumped to 116.1% on Tuesday from 105.3% on June 22. The 10-year ratio increased to 115.3% from 111.4%.
The 30-year ratio fell to 112.7% from 114.9% on June 22 as the muni rally outpaced the Treasury rally and munis became relatively more expensive than their Treasury counterparts.
The slope of the yield curve has continued to flatten throughout the most recent rally. The one- to 30-year slope of the curve flattened to 272 basis points on Tuesday from 295 basis points on June 22. The one- to 10-year slope also flattened to 153 basis points from 163 basis points.
Credit spreads have compressed as investors reach further down on the credit scale in search for yield. The five-year triple-A to single-A spread compressed to 63 basis points on Tuesday from 66 basis points on June 22 at the beginning of the most recent muni rally. The 30-year triple-A to single-A spread compressed to 73 basis points from 80 basis points.
The 10-year spread widened only slightly to 83 basis points on Tuesday from 82 basis points on June 22.
Much of the rally has been fueled by demand from coupon payments and bond calls, according to muni analysts at Citi. Once the summer redemption season ends on Aug. 1, redemptions drop off dramatically. “The typical dry spell begins, with total redemptions dropping from the $48 to $50 billion range to roughly $21 billion in August,” wrote the analysts. “As a consequence, net new issuance turns substantially positive despite an expected modest decline in gross supply.”
They added, “We thus expect the investor sectors that tend to put cash back to work quickly as bonds are redeemed — funds, separately managed accounts, and some direct retail — to have far less cash to put to work until the next up-cycle in redemptions begins, which is on Dec. 1.”