The tax-exempt market held its firmer tone Thursday despite weaker Treasuries and a stronger stock market.
Traders noted that despite building resistance against record low yields, demand for muni bonds continues to outweigh supply, keeping yields at depressed levels.
Demand outweighed supply in the muni market this week, and continued as the week’s largest deal priced for institutions Thursday.
Barclays Capital priced for institutions $997.3 million of University of California Regents limited project revenue bonds in tax-exempt and taxable series, following a retail order period Wednesday. The bonds are rated Aa2 by Moody’s Investors Service, AA-minus by Standard & Poor’s and AA by Fitch Ratings.
Yields on the first series, $896.9 million of tax-exempt bonds, ranged from 0.36% with a 3% coupon and 0.36% priced at par in a split 2014 maturity to 3.17% with a 5% coupon in 2042. Credits maturing in 2013 were offered via sealed bid. The bonds are callable at par in 2022.
Yields were lowered as much as seven basis points on the front end of the curve from the retail order period.
On the tax-exempt series, retail investors placed about 43% of orders on Wednesday, according to a spokesman for the California Treasurers office, and retail orders totaled about $357.32 million.
The second series of $100.4 million of taxable bonds were priced at par to yield 4.053% in 2041. The bonds were priced 160 basis points above the comparable Treasury yield.
Outside the week’s biggest deal, traders said the market was starting to quiet down. “The market is kind of boring,” a New York trader said. “It’s doing a little. But maybe a touch down.”
Still, munis were stronger again, according to the Municipal Market Data scale. Yields between the one-year and 12-year fell between one and three basis points. Outside 13 years, yields were flat.
The two-year yield dropped two basis points to 0.29%. The 10-year closed down one basis point to 1.60%, setting a new record low as recorded by MMD. The previous record was 1.61% set Wednesday. The 30-year yield ended the day at 2.79%, remaining at its record low for the second session.
Munis have bfinished flat or steady every session since June 22. Since then, the 10-year has fallen 26 basis points while the 30-year yield has dropped 37 basis points.
Munis defied Treasuries Thursday as the taxable market weakened. The two-year yield jumped two basis points to 0.24%. The benchmark 10-year yield and the 30-year yield each spiked up three basis points to 1.43% and 2.49%, respectively.
In other primary market news, RBC Capital Markets repriced $181.1 million of North East Independent School District unlimited tax school building and refunding bonds, rated Aa1 by Moody’s and AA-minus by Standard & Poor’s. The credit is backed by the Texas Permanent School Fund Guarantee Program, which carries triple-A ratings.
Yields ranged from 0.22% with a 2% coupon in 2013 to 3.29% with a 4% coupon in 2042. The bonds are callable at par in 2022. Yields were lowered as much as six basis points in the repricing.
Bank of America Merrill Lynch priced $172.9 million of California Health Facilities Financing Authority bonds in two series, rated Baa2 by Moody’s and BBB-plus by Standard & Poor’s.
Yields on the first series, $121.2 million of revenue bonds, ranged from 1.78% with a 5% coupon in 2015 to 4.28% with a 5% coupon in 2034. The bonds are callable at par in 2022.
The second series, $51.7 million of variable rate bonds, were priced 180 basis points above the SIFMA index maturing in 2042. The bonds are callable at par in 2017.
In the secondary market, trades compiled by data provider Markit showed firming. Yields on Massachusetts 4s of 2022 dropped five basis points to 1.81% while yields on Los Angeles Department of Water and Power 6.574s of 2045 fell one basis point.
Yields on Texas A&M University 5s of 2022 and Northside, Texas, Independent School District 3.625s of 2042 fell one basis point each to 1.73% and 3.63%, respectively.
Despite record low yields, many analysts say the muni market will most likely not see a sell-off anytime soon. “Quite simply, the massive size of the bond calls and maturities from June 1 to August 1 has put more cash in investor hands than they can easily put back to work,” wrote George Friedlander, muni analyst at Citi.
He added the long end of the curve in particular is seeing much more demand than supply. “The long end of the market isn’t seeing enough new supply to offset the continuing flow of calls of longer maturity bonds held by long-term funds,” he said. Bond funds generally tend to hold on to higher coupon paper until it is called. Now that these bonds are getting called, funds need to reinvest as quickly as possible to avoid reporting zero-yielding cash to investors.
Not only is high coupon paper being called, but net new supply is down, further exasperating the supply and demand imbalance. Almost 60% of new issue supply is coming from refunding, Friedlander said, and these new issues are nine-plus years shorter than the bonds they are replacing.