A selloff in the municipal bond market Friday after a better-than-expected June employment number continued into Monday as yields rose further.
Big price adjustments were contained by a stronger Treasury market and retail buying in munis.
“Treasury bumps are back and that’s helping,” a San Francisco trader said. “It’s only off maybe three to five basis points.”
Monday, Bank of America Merrill Lynch priced for retail $164.3 million of triple-A rated New York State Environmental Facilities Corp. revolving revenue bonds. Traders said $112 million orders were placed by retail. Institutional pricing is expected Tuesday.
Yields ranged from 0.59% with a 3% coupon and 0.68% with a 4% coupon in a split 2015 maturity to 4.35% with a 4.25% coupon in 2038. Bonds maturing in 2014 were offered via sealed bid. Portions of bonds maturing between 2024 and 2043 were not offered for retail. The bonds are callable at par in 2023.
Bonds maturing between 2016 and 2023 with 5% coupons yielded 12 basis points to 40 basis points above Friday’s Municipal Market Data scale.
An overall softer market Monday had a bigger effect on the secondary, traders said. “Issuers will get a feel for what things are doing today,” a San Francisco trader said. “It seems a few basis points weaker but hopefully we will stabilize at some point and the new stuff can come.”
Triple-A rated Georgia bonds were trading 12 basis points off the Municipal Market Data scale Monday morning, the trader said.
Other traders spent Monday deciding where prices would stabilize the rest of the week. “Everybody is trying to get a lay of the land as far as where the market should be based on Friday’s move,” a North Carolina trader said. “Some of the trades that are going through today look to be more retail oriented and seem to be at decent levels. Inside 10 years is under the most pressure.”
Still, this trader said many bonds still look expensive. “Stuff priced in the secondary is still too rich. New deals are going to readjust the market.”
The Environmental sale kicked off the primary in a week that could top $6 billion in new issues, including $5.95 billion in negotiated deals and $913.5 million in competitive auctions.
Earlier reports said Citi was expected to price $700 million of city and county of Denver airport system bonds Monday – the largest deal of the week – but traders said the deal probably will price Tuesday. The bonds are rated A2 by Moody’s Investors Service and A by Standard & Poor’s and Fitch Ratings.
In the secondary market, trades compiled by data provider Markit showed weakening.
Yields on Medford, Mass., 5s of 2020 jumped five basis points to 2.42% and Houston, Texas, Higher Education Finance Corp. 4s of 2022 increased four basis points to 4.28%.
Yields on Atlanta Development Authority 5s of 2032 rose three basis points to 4.70% and California’s MSR Energy Authority 6.5s of 2039 increased one basis point to 5.37%.
Yields on New Jersey Transportation Trust Fund Authority 5s of 2038 and Oregon Health Sciences University 4s of 2031 rose two basis points each to 4.61% and 4.34%, respectively.
Monday, yields on the Municipal Market Data scale ended as much as seven basis points higher. The 10-year yield increased five basis points to 2.71% and the 30-year yield rose one basis point to 3.96%. The two-year was steady for the second session at 0.52%.
Yields on the Municipal Market Advisors scale also ended as much as seven basis points higher. The 10-year yield rose six basis points to 2.88%. The two-year and 30-year yields increased one basis point each to 0.56% and 4.08%, respectively.
Treasuries posted gains Monday after a nearly 20 basis point selloff Friday on the longest maturities. The benchmark 10-year yield fell eight basis points Monday to 2.64% and the 30-year yield declined six basis points to 3.63%. The two-year yield fell four basis points to 0.36%.
Weaker munis and stronger Treasuries pushed ratios above 100% across the curve. The muni yield to Treasury yield ratio rose to 100.7% on Monday, above its three-month average of 100.4%. The 10-year ratio increased to 103%, above its three-month average of 99.6%.
The 30-year ratio closed at 109.1% on Monday, up from its three-month average of 101.3%.
From the beginning of June – before the biggest selloff hit munis – ratios have risen from below 100%. The five-year ratio jumped to 100.7% from 93.1% on June 3. The 10-year ratio increased to 103% from 98.1%. The 30-year ratio rose to 109.1% from 99.1%.
“Only a few times in recent history were ratios higher,” analysts at Citi wrote in a June 28 report. “We believe that the ratio trade is extremely attractive at the moment and that it has limited downside from current levels.”
While munis look cheap on a relative basis to Treasuries, they may also look cheap on an absolute basis as July has proven to hit munis almost as hard as in May and June.
From the end of June, the 10-year MMD yield has jumped 15 basis points to 2.71% and the 30-year yield has risen 13 basis points to 3.96%. The two-year yield increased two basis points to 0.52% from June 28.
Yields on the MMA scale have also risen from the end of June. The 10-year yield increased 16 basis points to 2.88% and the 30-year yield rose 13 basis points to 4.08%. The two-year yield rose three basis points over the month to 0.56%.
