The tax-exempt market traded steady throughout the day Tuesday as traders waited for primary issuance to provide direction for the market.
The majority of the week’s largest deals should price Wednesday and Thursday, leaving traders waiting in anticipation all day Tuesday.
“It’s extremely quiet right now,” a New Jersey trader said. “Most deals are pricing later in the week. We will take a look at pricings and make decisions then. But there is little in the secondary now.”
Other traders agreed the market was quiet and munis had a hard time trading in either direction after a three-day weekend. “It’s quiet,” a New York trader said. “It’s just like a typical slow Monday.”
In the primary market, most of the largest deals are expected to price Wednesday and Thursday.
Still, some deals priced Tuesday. RBC Capital Markets priced $99 million of Plaza Metropolitan District in Lakewood, Colo., revenue refunding bonds. Yields ranged from 1.00% with a 2% coupon in 2013 to 4.90% with a 5% coupon in 2040. The bonds are callable at par in 2022. Yields were lowered as much as 10 basis points in repricing.
In the secondary market, trades compiled by data provider Markit showed a mix of strengthening and weakening.
Yields on Ohio’s Buckeye Tobacco Settlement Financing Authority 5.875s of 2030 plunged six basis points to 6.65% while Minnesota 5s of 2017 fell one basis point to 0.72%.
Yields on Puerto Rico Aqueduct and Sewer Authority 6s of 2038 and Arizona State University Board of Regents 5s of 2043 fell two basis points each to 5.37% and 3.09%, respectively.
Other trades showed weakening.
Yields on Massachusetts School Building Authority 5s of 2022 jumped three basis points to 1.72% while New York State Thruway Authority 5s of 2042 increased two basis points to 3.22%.
Yields on New York’s Triborough Bridge and Tunnel Authority 5s of 2028 and Dallas-Fort Worth International Airport 5s of 2042 rose one basis point each to 2.63% and 3.79%, respectively.
After a three-day weekend, the Municipal Market Data scale ended flat on Tuesday. The 10-year and 30-year yields finished steady for the third session at 1.67% and 2.72%, respectively. The two-year finished steady at 0.33% for the fifth session.
The 10-year muni yield now trades only 20 basis points above its record low of 1.47% set Nov. 28. The 30-year yield trades 25 basis points above its record low of 2.47%, also set Nov. 28.
After weakening in the morning, Treasuries ended higher Tuesday. The benchmark 10-year yield and the 30-year yield fell one basis point each to 1.84% and 3.02%, respectively. The two-year yield slipped two basis points to 0.25%.
And while primary supply has picked up recently, demand for muni bonds has not waned. The Standard & Poor’s National AMT-Free Municipal Bond Index has returned 1.03% so far for the year.
Other indexes that track investment grade bonds have performed well too. The S&P Short Term National AMT-Free Municipal Bond Index — which tracks bonds maturing within five years — returned 0.25% so far this year. The S&P Intermediate Term National AMT-Free Municipal Bond Index — which tracks bonds maturing within 20 years — returned 0.77% so far this year.
High-yield bonds have also done well, and outperformed investment grade indexes. “High-yield municipal bonds have shown a positive total return of 1.18% buoyed by the tobacco settlement sector which started the year heading into negative territory and rebounding to a return of 1.23%,” wrote J.R. Rieger, vice president of fixed income at Standard & Poor’s Dow Jones Indices.
Indeed, the S&P Municipal Bond Tobacco Index returned 1.20% for the year through Jan. 22. The S&P Municipal Bond Land Backed Index also returned a high 0.79% for the month.
Taxable munis have also performed well this year with the S&P Taxable Municipal Bond Index returning 0.36% this year through Jan. 22.
And while the taxable municipal market has done well, several large primary deals are expected to come to market with significant taxable components, possibly putting pressure on the sector.
Later this week, JPMorgan is expected to price $1.1 billion of taxable Jobs Ohio Beverage System revenue bonds. Bank of America Merrill Lynch should price almost $200 million of taxable New Jersey Economic Development Authority refunding bonds.
Piper Jaffray is also expected to price $150 million of taxable North Orange County, Calif., Community School District bonds.
Some analysts say higher taxes have helped fuel demand for municipal bonds at the expense of corporate and Treasury bonds.
“Investment grade municipal bonds tracked in the S&P National AMT-Free Municipal Bond Indices are yielding 1.9% yield-to-worst or a taxable equivalent yield of over 2.9%,” S&P’s Rieger noted. “The yield of similar quality corporate bonds would need to be at least 2.9% for the investor to keep the same return.”
He added investment grade corporate bonds tracked in the Dow Jones U.S. Corporate Bond Index yield 2.58%, or more than 30 basis points lower than the 2.9% taxable equivalent yield of municipal bonds.
Indeed, on a relative basis, munis have outperformed other taxable markets like Treasuries as the muni yield to Treasury yield ratio plummeted so far this year.
On Tuesday, the five-year muni-to-Treasury ratio dipped to 94.7% from 110.5% on Jan. 2.
The 10-year ratio fell to 90.8% from 96.7% at the beginning of the year while the 30-year ratio slipped to 90.1% from 93.8% at the start of 2013.
