Muni yields headed higher Wednesday, reversing Tuesday’s gains, as the market softened after the New York City Housing Development Corp. sold nearly $700 million in revenue bonds, the last major deal of the week.
Traders said the market felt better in the morning as the New York housing deal priced, but turned softer as Treasuries worsened throughout the trading session and investors worried about muni fund outflows and Puerto Rico’s debt burden.
“It’s quiet out there,” a New York trader said in the morning. “There are some small competitive deals.”
A second New York trader said he wasn’t seeing the large amount of bid lists that usually surface in the morning session.
By Wednesday afternoon, municipal bond yields felt three to five basis points higher on bonds maturing beyond 10 years, traders said. “Munis are weaker but there is lower volume and overall just not as much demand,” a Chicago trader said. “There was a little strength this morning but it’s getting slower and slower.”
He added the $764.1 million California general obligation bonds that priced Tuesday came cheap, which pushed other California bonds in the secondary lower. “It’s going to make the market weaker for California stuff for a couple of weeks. Bonds were still available from the last deal they brought. This will hold it over too.”
With the week starting to wind down ahead of Labor Day weekend, one trader looked to municipal bond mutual fund flows for direction. “Fund flows Thursday will be particularly important after the Barron’s article,” a second Chicago trader said, referring to the cover story over the past weekend highlighting Puerto Rico’s debt problems. “Most institutional investors already know the severity of Puerto Rico’s fiscal situation but it’ll be interesting to see how retail and therefore fund flows react.”
Ahead of the Lipper FMI weekly fund flows report Thursday, Puerto Rico bonds headed lower in the secondary. In a block size trade of Puerto Rico Electric Power Authority revenue bonds a customer bought from a dealer 6.75s of 2036 at 7.44%, 19 basis points higher than where the bonds were bought Tuesday.
In a retail size trade of a different CUSIP of PREPA bonds, a customer bought from a dealer 7s of 2040 at 7.31%, 16 basis points higher than where the bonds were bought Tuesday.
Still, this trader said munis look cheap relative to Treasuries. “The sector still presents a great risk adjusted return without even having to take on a lot of duration or credit risk,” he said.
Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management said muni-to-Treasury ratios are attractive. “The 10-year municipal bond to Treasury yield ratio increased modestly as fund outflows continued to be heavy. Muni-Treasury ratios may decline over the coming trading sessions as supply is expected to be approximately 60% of the 2013 average during this holiday-shortened week.”
In the primary Wednesday, JPMorgan priced for retail $662.2 million of New York City Housing Development Corp. capital fund grant program revenue bonds, rated AA-minus by Standard & Poor’s. Institutional pricing is expected Thursday.
Yields on the first series of $188.4 million ranged from 1.17% with a 3% and 5% coupon in a split 2016 maturity to 4.14% with a 4% and 5% coupon in a split 2025 maturity. Bonds maturing in 2014 and 2015 were offered via sealed bid. The bonds are callable at par in 2023. Yields were lowered between one and three basis points on bonds maturing beyond 2019 from pre-marketing levels.
Bonds on the second series of $473.8 million yielded 4.70% with a 5% coupon in 2029 and 5.03% with a 5% coupon in 2033. Bonds maturing in 2014 and 2015 were offered via sealed bid. Bonds maturing between 2016 and 2032 were not offered for retail. The bonds are callable at par in 2023. Yields were lowered four and three basis points from pre-marketing levels on bonds maturing in 2029 and 2033, respectively.
JPMorgan repriced $111.3 million of New Jersey Health Care Facilities Financing Authority revenue bonds for Robert Wood Johnson University Hospital, rated A2 by Moody’s Investors Service and A by Standard & Poor’s.
Yields ranged from 1.28% with a 3% coupon in 2016 to 5.53% with a 5.5% coupon in 2043. The bonds are callable at par in 2023. Yields were lowered between three and five basis points on bonds maturing between 2016 and 2018 and lowered 10 and five basis points on bonds maturing in 2035 and 2043, respectively.
In the secondary market, trades compiled by data provider Markit showed a mix of strengthening and weakening.
Yields on Arizona’s Salt River Project Agricultural Improvement and Power District 5s of 2033 increased two basis points to 4.43%. Yields on Pennsylvania 5s of 2022 and Oregon 5s of 2042 rose one basis point each to 3.00% and 4.71%, respectively.
Other trades were stronger. Yields on Florida State Board of Governors 5s of 2043 slid three basis points to 5.22%.
Yields on California Health Facilities Financing Authority 5s of 2037 and New York’s Metropolitan Transportation Authority 5s of 2038 fell two basis points each to 5.25% and 5.11%, respectively.
Wednesday, yields on the triple-A Municipal Market Data scale ended as much as two basis weaker. The 10-year yield rose one basis point to 2.94% and the 30-year yield climbed two basis points to 4.45%. The two-year finished flat at 0.43% for the 31st straight session.
Yields on the Municipal Market Advisors scale ended as much as two basis points higher. The 30-year yield rose one basis point to 4.54%. The 10-year was flat at 3.08% and the two-year closed unchanged at 0.55% for the 10th session.
Treasuries weakened as the trading session progressed. The benchmark 10-year yield climbed seven basis points to 2.79% and the 30-year yield rose four basis points to 3.75%. The two-year yield rose three basis points to 0.40%.
