NEW YORK – The tax-exempt market ended slightly stronger on Wednesday, following Treasuries, as buyers were more comfortable entering the market after a six-day losing streak.
“The market is stable,” a Chicago trader said. “New deals seem to be going well today. Bonds saw price adjustments, but today they are cleaning up because the market feels better.”
He added the overall tone of the market has improved.
To be sure, one New York trader said the reversal after six trading sessions of losses won’t last long. “There is a ton of secondary supply that has continued to weigh on the market,” a New York trader said. “More than there’s been in awhile. We are waiting for capitulation in the market.”
He added muni traders keeping cutting bonds prices, following the drop in Treasuries in recent weeks, although they’re up Wednesday. “The Treasury has had the biggest decline in a long time.”
Munis were slightly stronger, according to the Municipal Market Data scale. Yields inside seven years were steady while the eight-year yield fell one basis point. The nine- and 10-year yields fell two basis points while the 11- to 24-year yields fell one basis point. Yields outside five years fell two basis points.
On Wednesday, the two-year yield finished steady at 0.36%. The 10-year yield and the 30-year yield each fell two basis points to 2.31% and 3.45%.
Treasuries were much stronger Wednesday. The two-year yield fell two basis points to 0.38%. The benchmark 10-year yield dropped seven basis points to 2.30% while the 30-year yield fell eight basis points to 3.38%.
In the primary market, Goldman, Sachs & Co. priced for retail $918.6 million of California State Public Works Board lease revenue bonds, rated A2 by Moody’s Investors Service and BBB-plus by Standard & Poor’s and Fitch Ratings. Pricing details were not yet available.
Goldman Sachs also repriced $493.2 million of city of Jacksonville, Fla., bonds in two deals.
The first deal, $281.7 million of Better Jacksonville sales tax refunding revenue bonds, were rated A1 by Moody’s, A by Standard & Poor’s, and A-plus by Fitch. Credits insured by Assured Guaranty Municipal Corp. were rated Aa3 by Moody’s and AA-plus by Standard & Poor’s.
Yields ranged from 0.85% with 2% and 3% coupons in a split 2013 maturity to 4.40% with a 4.25% coupon and 4.27% with a 5% coupon in a split 2030 maturity. The bonds are callable at par in 2022. Yields were lowered up to 10 basis points from preliminary pricing.
The second deal, $211.5 million of Jacksonville transportation refunding revenue bonds, were rated A1 by Moody’s and AA-minus by Standard & Poor’s and Fitch.
Yields on the first series, $153.3 million, ranged from 3.60% with a 4% coupon in 2022 to 4.40% with a 4.25% coupon and 4.22% with a 5% coupon in a split 2031 maturity. The bonds are callable at par in 2022. Yields were lowered up to 10 basis points from preliminary pricing.
Yields on the second series, $58.2 million, ranged from 0.75% with a 2% coupon in 2013 to 3.60% with a 5% coupon in 2022. Yields were lowered up to five basis points in repricing.
JPMorgan priced $452.8 million of New York Liberty Development Corp. revenue refunding bonds in three classes.
Yields on the first class, $313.1 million of bonds rated Aaa by Moody’s and AAA by Fitch, ranged from 3.66% with a 5% coupon in 2028 to 4% with a 5% coupon in 2040. The bonds are callable at par in 2022.
Bonds in the second class, $108 million rated A2 by Moody’s and A by Fitch, yielded 4.50% with a 5% coupon in 2043. The bonds are callable at par in 2022.
Bonds in the third class, $31.7 million rated Baa2 by Moody’s and BBB by Fitch, yielded 4.85% with a 5% coupon in 2044. The credit is callable at par in 2022.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board continued to show weakening.
A customer bought from a dealer California 5s of 2038 at 4.34%, 21 basis points higher than where they traded earlier in the month.
A customer sold to a dealer Dormitory Authority of the State of New York 5s of 2041 at 4.30%, 14 basis points higher than where they traded earlier in the month.
A customer sold to a dealer Tobacco Securitization Authority of Southern California 5.5s of 2036 at 0.21%, five basis points higher than where they traded earlier in March.
A customer sold to a dealer Empire State Development Corp. 5s of 2013 at 0.27%, four basis points higher than where they traded a few weeks prior.
Throughout the month of March, ratios have risen as munis underperformed Treasuries and became relatively cheaper. The five-year muni-to-Treasury ratio rose to 85% from 77.3%. The 10-year ratio rose to 98.3% from 93.4%.
And munis have recently become cheaper compared to Treasuries, ratios are still very rich when compared to levels seen over the past several months.
“By virtually all measures, the municipal bond market appears to be rich, especially when looking at muni-Treasury ratios for the past 12 months,” according to MMD’s Daniel Berger. “The muni market has rallied strongly during the first ten weeks of this year but we feel that the market may face greater headwinds until the next seasonal reinvestment period. We believe that new money should sit on the sidelines until relative value becomes more compelling, and the recent down [trend] in Treasuries abates.”
The slope of the curve has continued to collapse through month – and throughout the year – as investors reach further out on the yield curve in search of extra income. The 10- to 30-year slope of the curve fell to 114 basis points from 155 basis points at the beginning of March. It has fallen from 169 basis points from the beginning of the year.
Credits spreads have also compressed. The two-year triple-A to single-A spread fell to 39 basis points from 44 basis points at the beginning of March. The 10-year triple-A to single-A spread fell to 80 from 89 basis points at the beginning of the month. The 30-year spread dropped to 80 basis points from 82 basis points.
“When the yield curve is flat, investors can maximize their risk/return tradeoff by choosing fixed-income securities with the least risk, or highest credit quality,” Berger said. “For example, investors purchasing lower rated credits might experience weak performance should the triple-A to single-A 10-year spreads, currently at its 12-month low of 80 basis points, return to its recent 3-month average level of 90.8 basis points.