The tax-exempt market continues to rally with new record low yields being set almost every day in the last week of trading.
Municipal bond traders noted demand has outpaced supply during this Veterans Day holiday-shortened week. Traders are also anticipating a very slow holiday-shortened next week due to Thanksgiving, further heightening demand for municipals this week.
On top of limited supply, demand for municipal bonds has soared as investors fear an increase in tax rates.
“We are rallying big,” a New York trader said. “Retail is buying. They are scared of the tax hikes.”
“Everyone is buying,” a Chicago trader said. “People are looking to buy before next week. And demand is still there. The dynamic hasn’t changed. It’s a vacuum.”
The trader added he is buying across the curve. “We are buying sporadically. There is nothing specific but generally we are just all over the board. There’s no hot range. People are just buying all over.”
“The week started off slow with the election over and no shocks expected in the short-term, desks picked up roughly where they left off last week,” wrote Dan Toboja at Ziegler Capital Markets. “Bids remain firm on new issues, mostly from dealer desks with focus on retail, and on the deals that are pricing this week. We continue to grind to lower yields with new or near all-time lows.”
He added new deals are going well so far. “With so much demand not being met there is little chance of a supply forced sell-off in the short-term. With the majority of bid-sides on munis right now dealers [are] keeping shelves lined. There's not much appetite from larger funds to provide a support bid if the market begins to cheapen.”
And while supply and demand are the main driving factors in the muni market right now, the fiscal cliff is about to play a big role. “As we get closer to the new year and the impeding tax increases, spending cuts, and debt ceiling, the muni market may become more volatile,” Toboja said. “If lawmakers can get ahead of the issues and the market feels there's some sort of plan Q4 will close without drama. If a plan is pushed back or no progress appears to be made customers – both retail and institutional – will become more anxious. Market tone can change quickly.”
In the primary market, Barclays priced $656.5 million of Minnesota State general fund appropriation refunding taxable and tax-exempt bonds, rated AA by Standard & Poor’s and Fitch Ratings.
The first series, $54.6 million of taxable bonds maturing in 2014 and 2015, were offered via sealed bid.
Yields on the second series, $601.9 million of tax-exempt bonds, ranged from 0.45% with a 4% coupon in 2015 to 2.88% with a 3% coupon in 2030. The bonds are callable at par in 2022.
Bank of America Merrill Lynch priced $480 million of Dallas and Fort Worth International Airport joint revenue improvement bonds, rated A1 by Moody’s Investors Service and A-plus by Standard & Poor’s and Fitch. The bonds are subject to the alternative minimum tax.
Yields ranged from 2.98% with a 5% coupon in 2025 to 4.08% with a 4% coupon and 3.74% with a 5% coupon in a split 2045 maturity. The bonds are callable at par in 2021.
Citi priced $250 million of Orlando-Orange County Expressway Authority refunding revenue bonds, rated A2 by Moody’s and A by Standard & Poor’s and Fitch. B of A Merrill priced $207.5 million of additional Orlando-Orange County Expressway Authority refunding revenue bonds. Pricing details were not yet available for either deal.
In the competitive market, B of A Merrill won the bid for $140 million of Tennessee general obligation bonds, rated Aaa by Moody’s, AA-plus by Standard & Poor’s, and AAA by Fitch.
Yields ranged from 0.20% with a 4% coupon in 2013 to 2.66% with a 3% coupon in 2032. The bonds are callable at par in 2020.
In the secondary market, trades compiled by data provider Markit showed strengthening.
Yields on Mount Lebanon, Penn., Hospital Authority 5s of 2031 and Houston, Texas, 5s of 2021 dropped four basis points each to 3.21% and 132%, respectively. Yields on California 5s of 2025 fell three basis points to 2.44%.
Yields on Ohio’s Buckeye Tobacco Settlement Financing Authority 5.125s of 2024 and Dallas, Texas, Independent School Districts 5s of 2029 each dropped two basis points to 6.63% and 2.19%, respectively.
On Wednesday, the Municipal Market Data scale posted gains for the seventh consecutive session and record low yields were set yet again. The 10-year yield dropped one basis point to 1.54%, setting a new record low as recorded by MMD. The 1.54% record beat the 1.55% set Tuesday and the 1.57% set last Friday.
The 30-year MMD yield plunged four basis points to 2.60%, also setting a new record low. The 2.60% beat the previous record of 2.64% set Tuesday and the 2.66% set Friday.
The two-year finished steady at 0.30% for the 34th consecutive trading session.
Treasuries ended the day mostly flat after a mixed trading session. The two-year and 30-year yields were steady at 0.25% and 2.72%, respectively. The benchmark 10-year yield fell one basis point to 1.58%.
In similar bond news, the Federal Open Market Committee released minutes from its October meeting showing they plan to maintain an accommodative stance for the intermediate future and are prepared for additional easing next year.
The FOMC members mostly agreed the forward guidance recommending a highly accommodative monetary policy through at least mid-2015 had effectively communicated the committee’s intentions. The committee also indicated that further easing would likely occur at the expiration of Operation Twist.
“Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market,” the minutes stated.
“There were some clues on the Fed’s next policy manoeuver,” wrote Benjamin Reitzes, senior economist at BMO Financial Group. “Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market. This is consistent with our call for the Fed to start open-ended buying of Treasuries once Operation Twist ends, complementing the ongoing MBS purchase program.”
Reitzes added however that some of the FOMC members remain skeptical of more easing. “Several participants questioned the effectiveness of the current purchases or whether a continuation of them would be warranted if the recent moderate pace of economic recovery were sustained.”
“In addition, several participants expressed concerns that sizable asset purchases might eventually have adverse consequences for the functioning of asset markets or that they might complicate the Committee’s ability to remove policy accommodation at the appropriate time and normalize the size and composition of the Federal Reserve’s balance sheet,” he added.