The tax-exempt market strengthened for 14 consecutive sessions Thursday even as yields approached record lows.
Deals in the primary market Thursday — and throughout the week — received overwhelming support as new issue supply fails to keep pace with demand.
“It’s pretty boring because of the lack of inventory and yield,” a New Jersey trader said. “There is no relief on the horizon either, unfortunately.”
He added that increased supply is expected to come but it won’t be enough to offset the demand. “The calendar has been steady around $7 billion in new issues, but I don’t think there will be any noticeable change with munis until we see double that – or at least close to it. There is still too much cash and demand out there for the market to open up yet.”
Other traders agreed activity was subdued, and will remain so until yields spike. “I’m trying to get something going,” a New York trader said. “It’s a little busy. And I guess a little stronger.”
In the primary market, Morgan Stanley priced $344.4 million of Guam Power Authority revenue bonds, rated Baa3 by Moody’s Investors Service, BBB by Standard & Poor’s, and BBB-minus by Fitch Ratings.
Yields ranged from 1.45% with a 2% coupon in 2013 to 4.35% with a 5% coupon in 2034. Bonds maturing between 2019 and 2034 are insured by Assured Guaranty Municipal Corp. The bonds are callable at par in 2022.
In the competitive market, Citi won the bid for $234.7 million Florida Department of Transportation refunding bonds, rated Aa1 by Moody’s and AAA by Standard & Poor’s and Fitch.
Yields ranged from 0.20% with a 5% coupon in 2013 to 3.20% with a 3.25% coupon in 2034. The bonds are callable at par in 2022.
In the secondary market, trades compiled by data provider Markit showed strengthening. Yields on Ohio’s Buckeye Tobacco Settlement Financing Authority 5.875s of 2047 plunged four basis points to 7.42% while Iowa’s Dickinson County 2.375s of 2030 dropped three basis points to 2.42%.
Yields on Dormitory Authority of the State of New York 4.375s of 2034 and New Jersey’s Rutgers State University 5.665s of 2040 each fell two basis points to 3.15% and 4.10%, respectively.
Yields on Broward County, Fla., Airport System 5s of 2042 and Harris County, Texas, 5s of 2029 fell two basis points each to 3.75% and 2.30%, respectively.
On Thursday, the 10-year Municipal Market Data yield closed steady at 1.67% while the 30-year yield finished flat at 2.84% for the third session. The two-year closed flat for the eighth session at 0.30%.
Since munis began their steady to firmer streak on Sept. 17, the 10-year yield has plummeted 26 basis points from when it traded at 1.93%. The 30-year yield has plunged 22 basis points from when it traded at 3.06%.
The 10-year now hovers only seven basis points above its record low of 1.60% set July 26. The 30-year trades only five basis points above is record low of 2.79% hit July 25.
Treasuries posted losses after a sell-off Thursday. The benchmark 10-year yield jumped six basis points to 1.68% while the 30-year yield spiked up seven basis points to 2.89%. The two-year yield increased two basis points to 0.25%.
In other bond news, minutes from the Sept. 12-13 Federal Open Market Committee meeting were released, showing quantitative easing gained approval despite skepticism over the program’s effectiveness. The approval of QE3 in September subsequently led to a purchasing program of $40 billion a month of mortgage-backed securities for an unlimited time.
“Some participants thought past purchases were useful because they were conducted during periods of market stress or heightened deflation risk, and were less confident of the efficacy of additional purchases under present circumstances,” the minutes stated.
“A few expressed skepticism that additional policy accommodation could help spur an economy that they saw as held back by uncertainties and a range of structural issues,” according to the minutes.
“In discussing the costs and risks that such a program might entail, several participants reiterated their concern that additional purchases might complicate the committee’s efforts to withdraw monetary policy accommodation when it eventually became appropriate to do so, raising the risk of undesirably high inflation in the future and potentially unmooring inflation expectations,” the minutes stated.
Michael Gregory, senior economist at BMO Capital Markets Economics, said the minutes showed only a small majority — 11 of 19 — favored additional easing. “Note that the main argument against QE was that it might complicate the Committee’s efforts to withdraw monetary policy accommodation when it eventually became appropriate to do so,” he said, adding, “There is only a small majority of policymakers favouring QE.”
In terms of the forward guidance for the Fed funds rate, the minutes stated “a number of participants questioned the effectiveness of continuing to use a calendar date to provide forward guidance, noting that a change in the calendar date might be interpreted pessimistically as a downgrade of the Committee’s economic outlook rather than as conveying the Committee’s determination to support the economic recovery.”
Gregory noted, “The Fed is getting closer to using some economic speak instead of solely calendar speak in framing its forward guidance.”