NEW YORK – The tax-exempt market ended Monday weaker, continuing a three-day losing trend. Muni yields rose across the curve, although less so than they did late last week as volume dwindled.
At the end of the day, “munis are falling apart a bit,” a New York trader said, adding that munis were down much further in the morning when dealers were putting out bids 10 basis points lower and they were “getting hit.”
“People are throwing out bids to see if anyone will hit them,” he said. “And people are selling.”
Losses appeared to be stabilizing by the afternoon. “The market overall started off feeling like Thursday and Friday of last week, especially given the sell-off in Treasuries,” a second New York trader said. “But volume is light.”
In the afternoon, he added the “market seems to have stabilized at about five basis points in higher yields than Friday, but I am reserving judgment until we see some more volume in both the primary and secondary markets.”
On Monday, munis continued losses for the third consecutive trading session. Yields were steady inside four years and jumped between one and four basis points outside the five-year mark, according to the Municipal Market Data scale.
On Monday, the 10-year finished up four basis points to 1.87% and 30-year yield rose three basis points to 3.37%. The two-year closed steady at 0.35% for its seventh consecutive trading session.
Since munis started weakening last Thursday, the 10-year yield has jumped 20 basis points and the 30-year has spiked up 22 basis points.
Treasuries continued to weaken for a fourth consecutive trading day, with yields rising up to 26 basis points on the long end since losses started last Wednesday. On Monday, the benchmark 10-year yield rose three basis points to 2.07%. The 30-year yield jumped four basis points to 3.15%. The two-year was steady at 0.25%.
In the primary market Monday, Ramirez & Co. priced for retail investors a portion of the second biggest deal of the week: $400 million of New York City Municipal Water Financing Authority water and sewer system second-general resolution revenue bonds. Institutional pricing is expected to come to market Tuesday. The bonds are rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.
The first series, $350 million of 2045 term bonds were not offered for retail.
Bond on the second series of $50 million yielded 1.25% with 3% and 4% coupons in 2018 and 2.80% with a 5% coupon in 2027. Debt maturing in 2018 is callable at par in 2016 and debt maturing in 2027 is callable at par in 2021.
Because most of the deal was not offered for retail, “we probably won’t know much about the market for those bonds until institutional pricing,” the New York trader said. But he added that in the secondary market, the 5% term bond of 2044 from the last New York City Municipal Water Financing Authority traded at 3.92% Monday morning, about 30 basis points higher in yield than the low for this bond last Wednesday.
While supply in the municipal market this week is more than the market has seen all of 2012, supply is still not high compared to historical numbers. “New issue supply versus demand for municipal bonds is still out of kilter as we go into 2012 helping to keep yields down,” said JR Rieger, vice president of fixed income indexes at Standard & Poor’s.
Others agree. “Supply continues to trend lower than the estimated levels as we begin 2012,” wrote Peter DeGroot at JPMorgan, adding that supply so far this year has come in at about $10 billion, which is half of the trailing five-year average. He added that this week’s deals should receive better reception after the sizeable correction late last week.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening on Monday from last week.
A dealer bought from a customer JEA electric system revenue 4s of 2033 at 4.10%, 22 basis points higher than where they traded last Thursday.
A dealer sold to a customer Municipal Electric Authority of Georgia 6.637s of 2057 at 6.09%, 12 basis points higher than where they traded last Wednesday.
Another dealer sold to a customer Wisconsin Health and Educational Facilities Authority 5s of 2028 at 3.99%, eight basis points higher than where they traded last Friday.
Bonds from an interdealer trade of State Public School Building Authority of Pennsylvania 5.138s of 2029 yielded 4.71%, seven basis points higher than where they traded last Wednesday.
Muni-to-Treasury ratios fell last week as munis outperformed Treasuries. On Friday, the five-year muni-to-Treasury ratio fell to 92.1%, down from 102.5% the week prior. The 10-year ratio closed at 90.1%, down from 91.9% the week before. The 30-year ratio fell to 107.7% from 110.0% the prior week.
The yield curve has flattened despite the recent weakness in munis. Standard & Poor’s Rieger noted the difference in yields between the Standard & Poor’s AMT-Free Municipal Series 2013 and the 2021 indexes has moved from 225 basis points at the end of 2011 to 208 basis points as of last Thursday.
The spread between high-yield and investment grade bonds has also tightened by over 45 basis points in 2012 to close at 373 last Thursday, Rieger said. “That spread differential was last seen in the fall of 2011 prior to the bankruptcy filing by American Airlines which affects a number of municipal bonds,” he wrote. “The spread narrowing indicates the market is willing to take on more risk for higher yield.”
When looking at the structure on new bonds, JPMorgan’s DeGroot said low but volatile rates will likely mean the coupon on new bonds will be similar to bonds issued in late 2011. “We expected coupon composition to continue to reflect lower yields, as 30% of recent issuance has been below 4%,” he said. The 30% figure is twice the typical number of below 4% coupon bonds issued.
Lower-coupon issuance not only reflects the low interest rate environment, but shows how much issuance has been skewed towards the front end of the curve. So far this year, 40% of bonds issued mature within 10 years, DeGroot noted. “However, it is notable that investors still have a penchant for premiums 5s on the longer end in order to mitigate extension risk.