The tax-exempt market ended Thursday weaker for the fourth consecutive session this week as traders said bids were cheapening each day due to a flood of supply.
While the muni market weakened throughout the week, many market participants agreed the selloff was a correction of an overbought market and not a panicked selling.
“Bids are cheapening up in the street,” a New Jersey trader said. “I’m seeing it loosen up a bit. If clients want out they were better off doing it three days ago.”
He added the selloff appears to be somewhat controlled. “It’s probably just temporary end of the year stuff.”
Others agreed. “Weakness persists in the muni market,” wrote Dan Toboja, vice president at Ziegler Capital Markets. “The last several days have seen a selloff in munis. Although it’s been far from a fire sale there’s been about a 10- to 15-basis-point cheapening over the last three trading sessions.”
The selloff came from pressure in the primary and an overload of supply. “Participants had been carrying a lot of inventory and were caught by a larger than normal primary calendar,” Toboja said. “So far it’s been a controlled selloff with market players only cheapening bids five to 10 basis points from previous levels. Offers are cut, but within a relatively narrow range.”
Still, he added the weakening may not last long. “If this tone persists into next week and year-end the selloff could take more significance, but right now it feels more like recalibration than capitulation.”
He continued that in a true selloff the market would be pulling back bids hard and slashing offers. “Right now there are still a fair amount of bids, just at cheaper levels. Offers are being walked down in two- to five-basis-point increments. Wednesday had as much to do with the Federal Open Market Committee announcement as the uptick in new issue supply. There’s no sense of widespread panic.”
In the primary market, Wells Fargo Securities priced $239.9 million of Glendale, Ariz., Municipal Property Corp. tax revenue refunding bonds.
The first series, $39.6 million of senior lien excise tax revenue refunding bonds, is rated A2 by Moody’s Investors Service and AA-plus by Standard & Poor’s. Yields ranged from 2.53% with a 5% coupon in 2021 to 3.39% with a 5% coupon in 2033. The bonds are callable at par in 2023.
The second series, $183.4 million of subordinate excise tax revenue refunding bonds, is rated A3 by Moody’s and AA by Standard & Poor’s. Yields ranged from 2.03% with a 5% coupon in 2021 to 4.00% with a 5% coupon and 4.20% with a 4% coupon in a split 2038 maturity. The bonds are callable at par in 2018 except for bonds maturing in 2038 which are callable at par in 2023.
The third series, $16.9 million of taxable subordinate excise tax revenue refunding bonds, is rated A3 by Moody’s and AA by Standard & Poor’s. The bonds are priced at par ranging from a 1.30% coupon in 2014 to a 3.125% coupon in 2020.
Also, Jefferies & Co. delayed the scheduled sale of over $900 million of New York’s Triborough Bridge and Tunnel Authority bonds due to market conditions. A spokesman for the Authority said the deal is expected to come next week.
In the secondary market, trades compiled by data provider Markit showed weakening.
Yields on California’s ABAG Finance Authority for Nonprofit Corps. 5s of 2042 and New Jersey Transportation Trust Fund Authority 5s of 2042 jumped five basis points each to 3.76 and 3.36%, respectively.
Yields on San Francisco Public Utilities Commission 5s of 2024 and Delaware 4.55s of 2029 spiked up four basis points each to 1.96% and 3.32%, respectively.
Yields on Texas Municipal Gas Acquisition and Supply Corp. 5s of 2031 rose two basis points to 3.76% while Indiana State Finance Authority 5s of 2021 increased one basis point to 1.35%.
On Thursday, yields on the Municipal Market Data scale jumped as much as six basis points and have increased as much as 20 basis points over the week.
The 10-year yield jumped four basis points Thursday to 1.66% and has risen 18 basis points over the course of the week. It now trades 19 basis points above the record low of 1.47% set Nov. 28.
The 30-year yield spiked up six basis points Thursday to 2.65% and has risen 17 basis points over the course of the week. It now trades 18 basis points above its record low of 2.47% set Nov. 28.
The two-year finished flat at 0.30% for the 54th consecutive trading session.
Treasuries were weaker Thursday following weak trading sessions Tuesday and Wednesday. The benchmark 10-year yield jumped four basis points to 1.74%. The two-year and 30-year yields increased one basis point each to 0.26% and 2.91%, respectively.
In other muni bond news, Moody’s downgraded Puerto Rico general obligation debt two notches to Baa3 from Baa1 with a negative outlook, allowing the commonwealth’s GO rating to stay just one notch above junk status.
Meanwhile, Puerto Rico conduit debt was downgraded to junk status. The Public Finance Corporation, portions of Puerto Rico’s Highways and Transportation Authority’s subordinate bonds, and Puerto Rico Aqueduct and Sewer Authority debt were downgraded two notches to Ba1 from Baa2.
Traders were quick to react. “It’s still decent debt, but we’ll start to see how it’s going to trade real soon,” a New Jersey trader said. “Most of this downgrade talk must have been priced in for at least a week, but it’s still going to be a volatile credit right now, especially with the end of the year sell off on top of everything.”
