NEW YORK – The tax-exempt market continued to rally Friday after Thursday’s gains as traders sifted through the week’s heavy new issues.
“It’s a modestly firmer market,” said a trader in North Carolina. “Even Treasuries are off and it’s the end of the week and a lot of the primary is out of the way. The market has firmed back up from having a concession earlier in the week to bring in new deals.”
There is “continued buying” said a trader in New York, adding he is seeing yields fall between three and five basis points across the curve.
Munis were steady to firmer, according to the Municipal Market Data scale. Yields were unchanged within the four-year spot. Yields on the 5- to 12-year maturities fell three basis points while yields beyond that fell only two basis points.
The two-year muni closed Friday flat at 0.42% for its 13th consecutive trading session. The 10-year fell three basis points to 2.26% and the 30-year fell two basis points to 3.77%.
In the primary market Friday, RBC Capital Markets priced for retail $295 million of California Public Works Board lease revenue bonds. The bonds are rated Aa2 by Moody’s Investors Service, AA-minus by Standard & Poor’s and AA by Fitch Ratings. Pricing was not available by press time.
Loop Capital Markets priced for retail $200 million of University of Connecticut general obligation bonds. The credit is rated Aa2 by Moody’s, AA by Standard & Poor’s and AA-minus by Fitch.
Yields ranged from 0.2% with a 1.5% coupon in 2012 to 3.33% with 3.75% and 5% coupons in a 2026 split maturity. Portions of credits maturing in 2012 and credits maturing in 2031 were not formally re-offered.
In a weekly MMD survey, 82% of surveyed traders said they remain neutral on the market for the short term, versus 78% the week prior. More traders are bullish as well, with 9% reporting positive views on the short term, up from zero the week before. And those who said they are bearish on the market were down to 9% from 22%.
“The negative sentiment was due in large part to the expectation that the burgeoning supply calendar would trip up the market,” wrote MMD analyst Jeanine O’Connor. “But these concerns were strongly counterbalanced by the impressive fiscal catastrophe in the Euro Zone.” Thanksgiving week’s plunge in new issuance also helped market sentiment.
In the secondary market, credits showed gains Friday.
“With dealer inventories now focused on recent new issues, we could see strong secondary activity for a few days ahead of the Thanksgiving holiday,” wrote Alan Schankel, managing director at Janney Capital Markets. “The combination of light forward supply and the widespread price discovery opportunities…bode well for munis.”
And indeed, trades reported by the Municipal Securities Rulemaking Board showed hefty gains Friday.
A dealer bought from a customer New Jersey Transportation Trust Fund Authority 5.5s of 2031 at 4.50%, three basis points lower than where they traded Thursday. Bonds from an interdealer trade of New Jersey TTFA 5.25s of 2023 yielded 3.79%, 11 basis points lower than where they traded Thursday.
A dealer sold to a customer Minnesota Tobacco Securitization Authority 5.25s of 2024 at 4.51%, 12 basis points lower than where they traded Thursday. Bonds from an interdealer trade of Minnesota TSA 4.85s of 2026 yielded 4.80%, 13 basis points lower than where they traded Thursday.
Bonds that were issued in prior weeks also showed gains.
A dealer bought from a customer North Carolina Turnpike Authority 5s of 2041 at 4.15%, six basis points lower than where they traded Thursday. A dealer sold to a customer North Carolina Turnpike Authority 5s of 2036 at 4.09%, 11 basis points lower than where they traded Thursday.
Bonds from an interdealer trade of New York City 5s of 2026 yielded 3.35%, 11 basis points lower than where they traded Thursday.
Bonds from an interdealer trade of Ohio State’s Miami University 4.37s of 2032 at 4.37%, 12 basis points lower than where they traded Thursday.
The high level of December reinvestment money from maturing bonds along with muni bond fund inflows are all positive factors that “should help munis outperform Treasuries in the near future,” according to Schankel.
And muni bond fund flows were more than just positive. The tax-exempt market saw the heaviest inflows since September 2010, and the fifth consecutive week of inflows. Bond funds have also had inflows in the past nine of 10 weeks. For the week ending Nov. 9, bonds fund that report flows weekly saw $761 million of inflows, according to Lipper FMI.
“This inflow of new money into the muni space occurred in spite of the negative headlines from what became a national story – the decision by Jefferson County, Ala., to file for Chapter 9 bankruptcy,” wrote Chris Mauro, head of U.S. municipals strategy at RBC Capital Markets. “We view the resiliency of mutual fund investors in the face of this news to be a very constructive indicator for the municipal market.”
Munis outperformed relative to Treasuries. The five-year muni-to-Treasury ratio is 136%. The ten-year ratio is 110.7%, the highest it’s been since Oct. 13. The 30-year is 127.6%, the highest it’s been since Oct. 4.
