NEW YORK – Tax-exempt yields rose dramatically for the third straight session Wednesday, with 30-year yields again reaching 15-month highs as participants attempt to deal with the barrage of new-issue supply hitting the primary this week.
Traders said tax-exempt yields were higher by about eight to 10 basis points overall, with weakness extending to roughly 12 to 15 basis points on the long end.
“It’s difficult to hold your positions and be strong with so many bonds coming into a market that was already kind of on a slide,” a trader in Chicago said. “The market is saturated right now, but it’s going to come back like a bungee cord when it clears.”
A New York trader described the market as “terrible” Wednesday, saying that though a number of deals were pulled this week due to market conditions, it hasn’t helped much.
“There are just too many bonds and not enough buyers,” the New York trader said. “It’s going to take a long time to work through this [oversupply]. People just don’t know how many more sellers are out there. People would buy if the market had some predictability, but there isn’t any right now.”
The Municipal Market Data's triple-A scale yielded 3.01% in 10 years Tuesday, eight basis points higher than Monday’s 2.93%, while the 20-year scale yielded 4.15%, 12 basis points more than Monday’s 4.03%. The scale for 30-year debt climbed 12 basis points to 4.62% Tuesday from 4.42% Monday.
The MMD 30-year triple-A scale has now increased by 70 basis points since last Monday to its highest level in 15 months, since when it was also 4.62% on Aug. 13, 2009.
Meanwhile, 20-year debt is at its highest level since July 29 and 30, 2009, when it yielded 4.16%, and 10-year yields are at their highest level in seven months, since April 20, when the yield was also 3.01%, according to MMD.
“It doesn’t feel good out there,” a trader in Los Angeles said. “If you have a lot of inventory, you’re trying to get rid of it, and if you don’t, you’re trying to pick up some cheap ones on the bid side.”
Wednesday’s triple-A muni scale in 10 years was at 104.9% of comparable Treasuries and 30-year munis were at 107.7%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 116.7% of the comparable London Interbank Offered Rate.
Wednesday’s new-issue market was set to be led by California’s institutional pricing of $10 billion of revenue anticipation notes, but the pricing was delayed until Thursday due to the issuer needing to disclose a lawsuit filed Tuesday. The suit challenges a plan to sell and then lease back from the private-entity owner 24 State buildings at 11 sites, according to a release from the Treasurer’s office.
Instead, California will extend its retail order period into a third day, with orders being taken until 8 p.m., EST, Wednesday.
The delay also prompted the state to push back pricing its $2 billion issuance of taxable Build America Bonds to Friday. That sale was originally set to price Thursday.
During Monday and Tuesday’s retail order period on the notes, California sold 58.9% of the total offering, a total of $5.89 billion. A total of $1.46 billion was sold to retail Tuesday after $4.43 billion Monday.
Of the notes maturing on May 25, 2011, $822.7 million was sold to retail, while $5.07 billion of debt maturing on June 28 of next year went to retail. During Tuesday’s order period, $259.1 million and $1.21 billion respectively were sold to retail, after $563.6 million and $3.86 billion Monday.
According to the state Treasurer’s office, prices quoted to investors during the retail period were 1.25% for the May maturity and 1.50% for the June maturity.
“We launched this sale in some pretty rough waters,” said Tom Dresslar, spokesman for state Treasurer Bill Lockyer in a release. “Given the market conditions, we’re pleased with the retail demand.”
The deal breaks the previous record, also set by the Golden State, of a $9 billion sale of Rans in October 2002, according to data from Thomson Reuters.
Thursday’s institutional pricing on the Rans will now coincide with a $2 billion offering of taxable Build America Bonds from the state, also expected Thursday.
Though the municipal market has endured significant weakness over the past several weeks, it has mostly skipped past the shortest maturities.
The triple-A yield curve has increased 76 basis points since Nov. 1, according to MMD. Additionally, 20-year yields have risen 67 basis points in November, while the 10-year scale has increased 50 basis points over the same period. However, the short-end of the curve has been strong by comparison, with the triple-A one-year scale climbing just seven basis points this month.
The California Rans, whose principal and interest is payable exclusively from unapplied money in the state's general fund, are rated MIG-1 by Moody's Investors Service, SP-1 by Standard & Poor's, and F2 by Fitch Ratings. California's long-term GO ratings stand at A1 from Moody's and A-minus from Standard & Poor's and Fitch.
Elsewhere in the new-issue market Wednesday, Kentucky’s Louisville and Jefferson County Metropolitan Sewer District competitively sold $330 million of taxable BABs to Goldman, Sachs & Co.
The BABs mature in 2043, yielding 6.25% priced at par, or 4.06% after the 35% federal subsidy, and contain a make-whole call at Treasuries plus 25 basis points.
The credit is rated Aa3 by Moody’s and AA-minus by both Standard & Poor’s and Fitch.
Bank of America Merrill Lynch priced $332.2 million of North Texas Tollway Authority revenue bonds, downsized from an originally planned $541 million due to market conditions.
The bonds mature in 2034, 2038, and 2043, yielding 6.00%, 6.15%, and 6.25%, respectively, all with 6% coupons.
The bonds, which are callable at par in 2021, are rated A2 by Moody’s and A-minus by Standard & Poor’s.
Also, JPMorgan priced $302.9 million of revenue bonds for the Dormitory Authority of the State of New York.
The bonds mature from 2014 through 2025, with term bonds in 2030, 2040, 2043, and a split term maturity in 2050. Yields range from 2.22% with a 5% coupon in 2014 to 6.00% with a 5.75% coupon in 2050. Bonds maturing in 2043 are backed by Assured Guaranty Municipal Corp. All remaining bonds are uninsured.
The bonds, which are callable at par in 2020, are rated A3 by Moody’s and A-minus by Standard & Poor’s.
The Treasury market showed some losses Wednesday. The benchmark 10-year note was quoted recently at 2.88% after opening at 2.84%. The 30-year bond was quoted recently at 4.30%, after opening at 4.26%. The two-year note was quoted recently at 0.50% after also opening at 0.50%.
In economic data released Wednesday, consumer prices rose 0.2% in October led largely by an increase in gasoline prices.
However, core prices, which exclude food and energy costs, were unchanged for the third straight month. Over the past year, core prices increased just 0.6%, the smallest 12-month increase in the history of the index, which dates back to 1957.
September's headline CPI figure rose an unrevised 0.1%.
Economists expected October consumer prices would increase 0.3% and core prices would edge up 0.1%, according to the median estimate from Thomson Reuters.
Housing starts dropped to 519,000 at a seasonally adjusted annual rate as building permits edged higher to 550,000.
Housing starts fell to the lowest level since the record low of April 2009. Starts dropped in the South and the West regions. Starts in September were revised lower to 588,000 from 610,000 reported last month.
Building permits increased to 550,000, their highest level since August. September building permits were revised higher to 547,000 from 539,000.
Economists expected 600,000 housing starts and 570,000 building permits, according to the median estimate from Thomson Reuters.
Visible Supply
The Bond Buyer’s 30-day visible supply fell $3.708 billion to $13.240 billion. The total is comprised of $2.012 billion in competitive bonds and $11.227 billion in negotiated bonds.
Previous Session’s Activity
The Municipal Securities Rulemaking Board reported 53,526 trades of 17,242 issues for total volume traded of $16.14 billion on Tuesday. The most actively traded bond was Pennsylvania’s insured taxable Armstrong School District BABs 6.95s of 2037, which traded 684 times at a high of 102.500 and a low of par.
