Yields on tax-exempt bonds drifted higher Tuesday as inexpensive new deals by issuers including New York City dragged down prices in the secondary market.
Traders said high-yield and longer maturing bonds had the biggest price declines. “There are some pretty big high-yield bid-wanted lists out there,” a New York trader said. “And a lot of bids-wanted out there on the long end. There is probably not much July 15 coupon money left either and munis in general are taking a big hit.”
While the primary market stole most of the focus, Detroit’s bankruptcy and Chicago’s three-notch downgrade Friday were also on the minds of traders.
One analyst at data provider Markit said Detroit’s woes have been priced in since June. Since the bankruptcy filing, water sewer bonds and school district bonds have performed better than taxable certificates of participation and limited taxable bonds.
Average prices of water sewer revenue bonds maturing in 30 years were priced at 92.9 after the bankruptcy announcement, up from 91.5 earlier in July but down from 106.5 in May.
Average prices of school district revenue bonds maturing in 30 years were priced at 97.5 after the bankruptcy, down from 98 earlier in the month and 112.5 in May.
Average prices of limited taxable 10-year bonds were 71 after the filing, down from 73 before the filing and 71.3 in May. Taxable certificates of participation of 10-year bonds traded at 41 following the bankruptcy filing, down from 63 in May.
Still, the largest city to ever file for bankruptcy didn’t spread fear into the state’s debt. “I haven’t seen any big ripple effect in trading of Michigan bonds,” one analyst at Markit said, adding the state’s bonds are trading two to three basis points weaker since the downgrade.
Chicago was also on the minds of traders Tuesday following a three notch downgrade Friday to A3 from Aa3 by Moody’s Investors Service.
Another analyst at Markit said Chicago bonds were 10 to 15 basis points cheaper since the downgrade. “Long paper has been getting crushed,” he said.
“The Chicago market is off,” a second Chicago-based trader agreed. “I would say closer to 60 basis points. Some of it is getting lumped into Detroit too and that conversation is pushing all retail interest out. And institutions have been out for a while so there are not a lot of buyers.” He added most of the selloff is coming on the long-end of the curve.
The general market felt five to six basis points weaker, this trader said. “Demand is off from last week. Some people are waiting for Aug. 1 money but it’s slower.” Most of the weakness was on bonds maturing beyond 10 years.
In the primary market Tuesday, JPMorgan held a second retail order period for $513 million New York City general obligation bonds in two pricings. The bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
Yields on the first pricing of $375 million ranged from 0.99% with a 3% coupon in 2016 to 4.77% with a 4.625% coupon in 2039. The bonds are callable at par in 2023. Bonds maturing in 2015 were offered via sealed bid. Bonds maturing in 2026, between 2031 and 2034, in 2036, and 2037 were not offered for retail. Yields were unchanged from Monday’s retail order period.
Yields on the second pricing of $138 million ranged from 0.99% with 2% and 4% coupons in a split 2016 maturity to 2.72% with 4% and 5% coupons in a split 2021 maturity. Bonds maturing in 2014 were offered via sealed bid. Yields were unchanged from Monday’s retail order period.
Barclays repriced $300 million of District of Columbia Water and Sewer Authority public utility subordinate lien revenue bonds, rated Aa3 by Moody’s, AA by Standard & Poor’s, and AA-minus by Fitch.
The bonds yielded 4.85% with a 4.75% coupon in 2041, 4.89% with a 5% coupon in 2044, and 5.04% with a 5% coupon in 2048. The bonds are callable at par in 2023. Yields were lowered one basis point from preliminary pricing.
Bank of America Merrill Lynch repriced $197.2 million of Kansas City, Mo., general improvement airport refunding revenue bonds, rated A2 by Moody’s and A-plus by Standard & Poor’s.
Yields on the first series of $145 million, subject to the alternative minimum tax, ranged from 0.70% with a 2% coupon in 2013 to 4.60% with a 5.25% coupon in 2027. The bonds are callable at par in 2021. Yields were lowered as much as 10 basis points on bonds maturing between 2014 and 2020.
Yields on the second series of $52.1 million ranged from 0.75% with a 4% coupon in 2015 to 2.35% with a 5% coupon in 2019. Yields were lowered as much as 12 basis points from preliminary pricing.
Traders said there were $200 million of orders for the second series. “It’s a blowout,” the New York trader said. “They are cheap. The 2019 maturity is 80 basis points off the triple-A scale and 28 basis points off the single-A scale.”
JPMorgan priced for retail $164.3 million of Florida’s Jacksonville Electric Authority water and sewer system revenue bonds, rated Aa2 by Moody’s and AA by Standard & Poor’s and Fitch.
The first series of $92.1 million were not offered for retail. Yields on the second series of $72.2 million ranged from 0.73% with a 3% coupon in 2015 to 4.38% with a 4.25% coupon in 2027. Bonds maturing in 2014 were offered via sealed bid. The bonds are callable at par in 2019.
Cheap primary deals pulled prices down in the secondary market. “It’s a self-fulfilling prophecy in a way,” the New York trader said. “The new issues are being priced so cheaply that yields are getting pulled that way naturally in the secondary.”
Trades compiled by Markit showed weakening. Yields on Louisiana Public Facilities Authority 5s of 2042 jumped 10 basis points to 5.21% and Texas Transportation Commission 5s of 2041 rose eight basis points to 5.36%.
Los Angeles Department of Airports 5s of 2040 increased six basis points to 4.78% and New York 5s of 2033 rose five basis points to 4.36%.
Tuesday, yields on the Municipal Market Data scale ended as much as eight basis points weaker. The 10-year yield increased five basis points to 2.72% and the 30-year yield rose eight basis points to 4.23%. The two-year finished steady at 0.43% for the fifth consecutive session.
Yields on the Municipal Market Advisors scale ended as much as nine basis points higher. The 10-year yield increased five basis points to 2.90% and the 30-year yield rose nine basis points to 4.31%. The two-year was steady at 0.53% for the fifth session.
Treasuries ended weaker. The benchmark 10-year yield rose two basis points to 2.51% and the 30-year yield increased three basis points to 3.58%. The two-year yield rose one basis point to 0.31%.