Activity in the secondary market picked up Wednesday with waning demand in the primary markets as traders said buyers were wary of continued outflows from municipal bond funds, next week’s Federal Reserve meeting, and negative headlines from Puerto Rico and Detroit.
Those negative factors for the muni market kept buyers on the sidelines, even with a stronger Treasury market.
“There is a little better flow today but I would not say it’s stronger,” a New Jersey trader said. “In the secondary we are buying and trying to find certain spots, but we are selective.”
The likelihood of outflows continued to weigh on the market a day after Puerto Rico said it would rein in issuance for the rest of the year after yields on its debt soared and as litigation threatened to prolong Detroit’s bankruptcy proceedings. The Fed is expected to begin tapering its bond buying program after its Sept. 17-18 meeting. “The Fed is on people’s minds and so is Puerto Rico and Detroit,” the trader said. “And with these outflows just continuing and continuing, it’s hard to make the case for a firmer market even with Treasuries up.”
Other traders noted yields on high-grade bonds looked firmer, along with Treasuries, though the high-yield market suffered.
“The general market feels a little better but high-yield doesn’t,” a Chicago trader said. “The market is up and down, and everyone is afraid and no one is spending money. People are expecting outflows after the Puerto Rico news and potentially Fed tapering next week.”
Many of the week’s largest deals priced Tuesday, and the remainder are expected to price Thursday, giving the primary market breathing room Wednesday. But it wasn’t enough to offset light demand. “Deals are struggling,” the Chicago trader said.
The New Jersey trader said deals looked “just OK.”
In the biggest deal Wednesday, JPMorgan priced $287.4 million of Alameda County Joint Powers Authority lease revenue bonds, rated Aa3 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
Yields ranged from 1.99% with a 3% and 5% coupon in a split 2018 maturity to 5.22% with a 5.125% coupon in 2035. The bonds are callable at par in 2023. Yields were lowered between three and 10 basis points on bonds maturing between 2018 and 2024 from retail pricing.
Jefferies & Co. repriced $86 million of Philadelphia Municipal Authority city agreement revenue refunding bonds, rated A2 by Moody’s and A-minus by Standard & Poor’s.
Yields ranged from 0.40% with a 1.25% coupon in 2014 to 2.37% with a 5% coupon in 2018. Yields were lowered between two and five basis points from preliminary pricing.
Jefferies also priced $100 million of Suffolk County, N.Y., tax anticipation notes, rated SP-1 by Standard & Poor’s and F-1 by Fitch. The notes yielded 0.55% with a 2% coupon in 2014.
In the competitive market, Bank of America Merrill Lynch won the bid for $115 million of Palm Beach County, Fla., School District TANs, rated MIG-1 by Moody’s. The notes yielded 0.12% with a 4.5% coupon in 2014.
In the secondary market, trades compiled by data provider Markit showed strengthening.
Yields on Lower Colorado River Authority, Texas, 5s of 2021 slipped seven basis points to 3.16% and University of Illinois 4s of 2032 fell two basis points to 5.18%.
Yields on New Britain, Conn., 5s of 2021 and New York City Municipal Water Finance Authority 5.5s of 2040 fell two basis points each to 3.30% and 4.48%, respectively.
Yields on Ohio’s Buckeye Tobacco Settlement Financing Authority 5.125s of 2024 and California Statewide Communities Development Authority 5s of 2043 fell one basis point each to 8.47% and 5.44%, respectively.
On Wednesday, yields on the triple-A Municipal Market Data scale ended as much as four basis points firmer. The 10-year yield fell four basis points to 2.95% and the 30-year yield dropped two basis points to 4.46%. The two-year was steady at 0.43% for the 40th straight session.
Yields on the Municipal Market Advisors scale ended as much as three basis points lower. The 10-year and 30-year yields fell two basis points each to 3.10% and 4.57%, respectively. The two-year closed unchanged at 0.55% for the 19th session.
Treasuries posted gains Wednesday, erasing Tuesday’s losses. The benchmark 10-year yield slid four basis points to 2.92%. The two-year and 30-year yields fell three basis points each to 0.45% and 3.86%, respectively.
Looking to the Federal Open Market Committee meeting announcement next Wednesday, many economists believe the Fed will start tapering its $85 billion-a-month bond purchasing program.
“The tepid labor data likely creates some trepidation for the Fed as we move towards the September FOMC meeting,” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management, referring to Friday’s worse-than-expected employment report. “We continue to expect the Fed to begin tapering of quantitative easing at the September meeting by scaling back monthly bond buying in the range of $10 to $15 billion. In our view, the Fed’s concerns regarding diminishing returns from further asset purchases outweighs their consternation stemming from consecutive lukewarm employment reports.”
“Over the near term, we anticipate interest rate volatility will remain close to current levels and higher than what we have generally observed over the past couple of years,” he said. Within munis, muni-to-Treasury ratios “may remain near current levels over the coming trading sessions as supply is expected to be approximately 100% of the 2013 weekly average.”