Detroit bonds were able to avoid a selloff in the secondary market Monday after the city said Friday it may default on up to $2 billion in debt.
Detroit paper flooded the market in an otherwise quiet session, with water and sewer debt holding up fairly well and general obligation bonds weakening.
“There is no panicked selling because no one knows the plan,” a New Jersey trader said. “Even in the documents of proposal there is no mention of any kind of percentage of a haircut. Verbally a 90% haircut has been thrown out there but that’s more of a wish list.”
One CUSIP of water supply system 5.75s of 2027 was bought by a dealer Friday at $108.319 and was reoffered Monday at $109.75. The bond is insured by Berkshire Hathaway Assurance Corp.
“I see a BHAC insured Detroit water bond out on a bid-wanted, and some Assured Guaranty Municipal Corp. Detroit sewer floaters being offered out there too,” a New York trader said. “It’s not being given away. The offer is well above the pricing evaluations for it.”
Another trader noted a mark-up in price on Detroit water bonds. A dealer bought $1.5 million of 5.75s of 2027 at 4.02%, only to reoffer the bonds in the secondary market at 3.85%.
In odd-lot trading of Detroit Water Supply System revenue senior lien 5.25s of 2041, bonds on an interdealer trade yielded 5.38% Monday, up 10 basis points from where the bonds traded Thursday, according to the Municipal Securities Rulemaking Board.
Bonds in another interdealer trade of Detroit 5s of 2028 yielded 5.44%, up 17 basis points from where the bonds traded Wednesday.
Trades compiled by Interactive Data showed slight weakening Monday on block size trades.
Yields on sewage disposal revenue 4.5s of 2035 yielded 5.19% on Monday, up two basis points from where the bonds yielded Thursday.
Yields on the Downtown Development Authority 5.25s of 2013 rose throughout the day Friday to 21.34% from 19.12%. Trading data for Monday was not available.
In the primary market, supply is expected to increase slightly to $6.40 billion from last week’s revised $6.18 billion. The negotiated calendar can expect $5.37 billion, up from last week’s revised $4.38 billion. On the competitive side, $1.03 billion should be auctioned, down from last week’s revised $1.80 billion.
Monday, Citi kicked off the week’s new issue supply with a retail pricing of $368.7 million of New York City Municipal Water Finance Authority water and sewer system second general resolution revenue bonds. Institutional pricing is expected Tuesday. The bonds are rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.
Yields ranged from 3.42% with a 5% coupon in 2028 to 4.40% with a 4.25% coupon and 4.18% with a 5% coupon in a split 2047 maturity. Bonds maturing in 2039 were not offered for retail. The bonds are callable at par in 2023.
In the general secondary market, few retail-sized trades took place. “It’s neutral, really, and quiet,” the New York trader said. “Just odd-lot trades so far.”
Trades compiled by data provider Markit showed strengthening.
Yields on Virginia Tobacco Settlement Financing Corp. 5s of 2047 dropped five basis points to 6.88% and New York City Transitional Finance Authority 5s of 2042 slid three basis points to 3.96%.
Yields on Hamilton County, Ohio, Health Care Facilities 5s of 2042 fell two basis points to 4.98% and California State University 5s of 2037 dropped one basis point to 4.05%.
Yields on Puerto Rico Commonwealth Aqueduct and Sewer Authority 5.25s of 2042 and New Jersey 5s of 2019 fell one basis point each to 5.84% and 1.65%, respectively.
Yields on the Municipal Market Data scale ended flat Monday. The 10-year and 30-year yields were flat at 2.23% and 3.50%, respectively. The two-year was steady at 0.31% for the fourth session.
Muni yields on the Municipal Market Advisors 5% scale closed mostly flat. The 10-year and 30-year yields were steady at 2.33% and 3.62%, respectively. The two-year was flat at 0.38% for the second session.
Treasuries mostly sold off Monday on better-than-expected economic news and anticipation of Wednesday’s Federal Open Market Committee meeting. The benchmark 10-year yield jumped five basis points to 2.18% and the 30-year yield climbed six basis points to 3.36%. The two-year yield fell two basis points to 0.27% as investors shortened duration.
In other muni bond news, the implied average transaction cost of buying an individual bond fell for retail investors to 1.62% in March 2013 from 1.97% in December 2012, according to Standard & Poor’s Dow Jones Indices.
That figure has been mostly falling since May 2011 when the cost hit 2.04%. It ticked up slightly to 2.12% in September and October of 2011 then fell below 2% in March 2012. The transaction cost fell through most of 2012 before ticking back up to 1.97% in December. Since then, it fell to 1.71% in January 2013, to 1.70% in February, and 1.62% in March — the lowest since S&P Dow Jones Indices began tracking the data in May 2011.
Still, buying individual bonds may not be as efficient as buying a mutual fund. “Buying individual municipal bonds may not always be the most efficient transaction when compared to buying mutual funds or ETFs, for which there may be no, or lower, transaction costs,” according to the report.
S&P Dow Jones Indices calculated the monthly average difference between the price at which retail customers buy and sell the same bond on the same trading day. Only trades of $100,000 or less are included.