Two large high-grade borrowers priced in the primary market Thursday amid a choppy and illiquid secondary market, with buyers choosing to stay on the short end of the curve.
Dallas and Charlotte issued over $100 million and were able to lower yields in repricing and borrow at yields close to the Municipal Market Data triple-A benchmark scale.
Still, traders were hesitant to put both feet into the market as yields have risen steadily over the past two months and mutual funds continue to see outflows. Traders said tax-exempt yields were higher by one or two basis points.
“The market is so choppy that it’s buyer beware,” a Texas trader said. “We are so interest rate sensitive that if Treasuries are choppy, you might think you have strategic pricing but then it might not work,” he said, referring to deals pricing in the primary.
This trader added bonds on the short end of the curve have been well received this week, particularly because of supply and demand. “You are getting a sharp yield curve. The institutions still have to place money so they are hedging their bets by buying short-term paper. But from a municipality standpoint, they are still pushing out to the terms because rates are good. So buyers like short-term, issuers like the long-end. The short stuff goes quick.”
In the secondary market, more bid-wanted lists surfaced in the morning, though a New York trader noted the market wasn’t impacted.
The Michigan Finance Authority issued $92 million of Detroit Public School short-term notes Tuesday and a few dealers showed bonds in the secondary throughout the week. Thursday morning, a dealer showed a bid for 4.375s of 2014 at 100.3, or a yield of 4.1%. On Tuesday, the bond priced at par.
Back in the primary, Bank of America Merrill Lynch repriced $156.4 million of Dallas, Texas, waterworks and sewer system revenue refunding bonds, rated Aa1 by Moody’s Investors Service and AAA by Standard & Poor’s.
Yields ranged from 0.50% with a 5% coupon in 2015 to 4.70% with a 5% coupon in 2042. Bonds maturing in 2014 were offered via sealed bid. The bonds are callable at par in 2023.
Yields were lowered as much as five basis points from preliminary pricing. Spreads on bonds with 5% coupons ranged from seven basis points to 33 basis points above Wednesday’s Municipal Market Data scale.
Wells Fargo Securities priced $104 million of triple-A rated Charlotte, N.C., general obligation refunding bonds. Yields ranged from 0.46% with a 5% coupon in 2015 to 4.05% with a 4% coupon in 2029. Bonds maturing in 2014 were offered via sealed bid. The bonds are callable at par in 2023.
Spreads on bonds with 5% coupons ranged from three basis points to 15 basis points above Wednesday’s MMD scale.
In the secondary market, trades compiled by data provider Markit showed mostly weakening. Yields on Fulton County, Ga., water and sewer 5s of 2021 rose three basis points to 2.81%.
Yields on Kansas Power Pool 5s of 2027 and Fort Bend, Texas, Independent School District 5s of 2021 rose two basis points each to 5.09% and 2.82%, respectively.
Yields on New York’s Metropolitan Transportation Authority 5.25s of 2040 and New Jersey State Turnpike Authority 5s of 2032 increased one basis point each to 5.20% and 4.94%, respectively.
As mutual funds continue to see outflows from muni bond funds, most of the buying in the secondary market is driven by the retail investor. “There are wide disparities in value among credits and structures,” wrote Dan Toboja, vice president at Ziegler Capital Markets. “If a particular bond fits a retail inquiry due to state or credit it may well out-trade comparable bonds by 50 basis points. The result is continued focus to find the retail bid with obsession. Some bonds do not fit any specific inquiries and transactions on those bonds remain exceedingly difficult on the secondary.”
Thursday, yields on the triple-A Municipal Market Data scale ended as much as two basis points higher. The 10-year yield increased one basis point to 2.94% and the 30-year yield rose two basis points to 4.46%. The two-year finished flat at 0.43% for the 27th straight session.
Yields on the Municipal Market Advisors scale ended as much as two basis points higher. The 10-year yield rose two basis points to 3.09% and the 30-year yield increased one basis point to 4.55%. The two-year was flat at 0.55% for the sixth session.
The Treasury yield curve flattened with yields rising on the short-end and falling on the long-end. The two-year and benchmark 10-year yields rose two basis points each to 0.40% and 2.90%, respectively. The 30-year yield slid two basis points to 3.88%.
In odd-lot trades of under 100 bonds, trading activity jumped and buy trades were the highest in five weeks, according to BondDesk Group.
For the week through Aug. 21, buy trades increased to 96,798 from the previous week’s 85,372 and is the highest in five weeks. Sell trades increased to 38,230 from the previous week’s 36,793 and was the highest since the week ending July 31 when there were 38,925 trades.
The buy-to-sell ratio spiked to 2.5 from 2.3 the week before, and was the highest in five weeks.
Par value traded also rose significantly with $2.439 billion in buy trades versus the previous week’s $2.176 billion and is the highest in five weeks. Sell trades increased to $1.019 billion from the previous week’s $992 million. Par value of sell trades was the highest since $1.039 billion in the week ending July 31.
The buy-to-sell ratio in par value rose to 2.4 from 2.2 and was also the highest in five weeks.