Municipal bond traders bought paper maturing in five-to-15 years as they sought higher yields in the secondary market in the midst of a light calendar for new issues.
“Traders are selling short and resetting portfolios in the five- to seven-year range to reach for yield,” a New Jersey trader said. “People are holding on to longer bonds because they can’t replace them with anything so most activity is on the very short end,”
The five-year yield on the triple-A rated Municipal Market Data 5% coupon scale rose to 0.78% on Wednesday from 0.73% on May 1. The seven-year yield increased to 1.27% from 1.12%.
Other traders said the reach for yield extended out into bonds maturing in 15 years. One Chicago trader said a Boston mutual fund propped up the market in the morning by buying 4% coupons and higher in the seven- to 15-year range in $1 to $10 million block sizes.
The 15-year MMD yield jumped to 2.35% on May 15 from 2.20% on May 1.
Others continued to advocate buying bonds in the 11-year range. “We continue to believe that the five- to 11-year range offers best value without taking outsized interest rate risk,” said John Dillon, chief municipal bond strategist at Morgan Stanley Wealth Management. “Close to 65% of the yield available throughout the 30-year curve is currently captured by year 11, which equates to nearly two-thirds of all the yield in just over one-third of the total maturity range.”
The 11-year MMD yield increased to 1.94% on May 15 from 1.76% on May 1.
Still, munis have outperformed Treasuries recently and the 10-year ratio fell to 93.4% from 101.2% on May 1.
“The 10-year Treasury is off 30 basis points in the last two weeks while the 10-year muni is only off 13 basis points,” the Chicago trader said. Since an employment report May 3, the 10-year Treasury yield increased to 1.95% Wednesday from 1.63%, whilethe 10-year muni yield increased to 1.83% from 1.68%.
Losses in Treasuries may not translate into losses for munis, according to Dillon.
“Now, seasonal factors in the municipal market are about to shift yet again,” he said. “This time, the move should facilitate a stronger tone in the coming months, as bond redemptions rise and new-issue supply typically declines in the summer months. With only a few weeks left until more favorable June redemptions arrive, market professionals appear to be looking in that direction and growing more confident.”
Outside certain spots on the yield curve, traders said the overall market slowed to a crawl as Wednesday progressed. “Munis have performed but customers are backing away,” the Chicago trader said. “There is money to put to work but we are not seeing a lot of it. Stocks are at their highs and there are a lot of cross currents.”
Until the yield curve cheapens, there won’t be any exciting trades, he said. The one- to 30-year slope of curve finished at 279 basis points Wednesday while the one- to 10-year slope closed at 164 basis points.
Other traders said the market was quiet. “It’s beyond slow,” the New Jersey trader said. “It has ground to a halt. There is not a lot of primary and there is the fear that the Fed may start to unwind [quantitative easing] and it will have a major effect on Treasuries and stocks.”
JPMorgan priced $404 million of Board of Education of the City of Chicago unlimited tax general obligation refunding bonds, rated A2 by Moody’s Investors Service and A-plus by Standard & Poor’s.
Bonds in the first series of $122.6 million mature in 2026 with a soft put date in 2016. The bonds were priced at par, yielding 70% of the one-month LIBOR plus 58 basis points. The bonds are callable at par in 2015.
Bonds in the second series of $124.3 million mature in 2035 with a soft put date of 2017. The bonds were priced at par, yielding 75 basis points above the SIFMA index. The bonds are callable at par in 2016.
Bonds in the third series of $157.1 million mature in 2036 with a soft put date in 2018. The bonds are priced at par, yielding 83 basis points above the SIFMA index. The bonds are callable at par in 2017.
In the secondary market, trades compiled by data provider Markit showed mostly weakening.
Yields on St. Johns County, Fla., water and sewer 0s of 2031 increased three basis points to 3.97% and Harris County, Texas, Cultural Education Facilities Finance Corp. 4s of 2035 rose two basis points to 4.14%.
Yields on Hamilton County, Ohio, Health Care Facilities 5s of 2042 and Lompoc Valley, Calif., Medical Center 4s of 2036 rose one basis point each to 4.12% and 4.10%, respectively.
Yields on the MMD scale were as much as one basis point weaker Wednesday. The 10-year and 30-year yields finished steady at 1.83% and 2.98%, respectively. The two-year held steady at 0.28% for the fifth session.
The Municipal Market Advisors 5% scale also showed yields rising as much as one basis point Wednesday. The 10-year and 30-year yields closed flat at 1.89% and 3.10%, respectively. The two-year yield held steady at 0.33% for a fourth consecutive session.
Treasuries posted gains in the morning and ended the day flat on the long-end. The two-year and benchmark 10-year yield slid one basis point each to 0.25% and 1.95%, respectively. The 30-year was steady at 3.17%.