NEW YORK — The municipal market once again played the wallflower during Tuesday’s quiet trading session, standing riveted as equities and Treasuries performed a dramatic dance.
Equities led with a strong opening and finish. Treasuries followed with an impressive run after midday. The Federal Reserve tried to cut in during one point in the afternoon. But munis all the while stalled and waited throughout an otherwise turbulent and stomach-churning day in the financial markets.
Retail investors in munis had one eye glued to their stocks all day, traders said. Many saw whipsawing equities and rock-bottom muni yields and decided to hold fast, a trader in New Jersey said.
“The retail buyer is like a deer in the headlights right now: they’re afraid to make a move,” he said. “With rates this low, there’s no hurry to put money in munis right now.”
Institutions, meanwhile did not want to give up their book yields at current prices, the New Jersey trader said. And dealers sat on the bonds they keep for inventory, he added.
In fact, the muni market Tuesday hinged on what happened in the stock market, traders said. Investors wanted to see stocks stabilize before they would return their focus to bonds.
Yesterday’s stock market implosion set the tone. By early morning Tuesday, with stocks doing better out of the gates and into the early afternoon, client calls were on the rise, a California trader said.
For their part, the equities markets looked as though they had, with some difficulty, successfully picked themselves up from the mat after Monday’s thunderous bodyslam. The equities markets indexes soared and sank with equal enthusiasm, but all ended the day up by at least about 4.00%. The Dow Jones Industrial Average rose almost 430 points.
The Federal Reserve added a jolt to the day when said it would hold its benchmark interest rate at a record low until at least mid-2013 at the Federal Open Market Committee announcement, following its meeting. Both equities and Treasuries made dramatic moves in response.
Muniland also has been nervous about the status of many of its credits after Standard & Poor’s docked the U.S. rating on Friday. In several reports released Monday, Standard & Poor’s downgraded public finance housing credits linked to Fannie Mae, Freddie Mac, or the Federal Housing Administration, whose credit profiles are all directly linked to the U.S. credit rating.
But the rating agency essentially plumped for munis when it said that public finance credits stand “among the most stable and predictable in the world.” Furthermore, it added, the decentralized structure of the government allows for state and local credits to be analyzed independently.
Muni yields shadowed those of Treasuries to start the day. They weakened in the morning, only to firm up enough after the Fed announcement to end the day flat, according to the Municipal Market Data triple-A scale.
With little activity, the benchmark 10-year muni yield held steady for a second straight day, closing at 2.38%. It equaled its lowest yield in almost 10 months, dating to Oct. 21.
The two-year muni yield also held at 0.35%, its lowest yield since Aug. 31, 2010. The 30-year muni yield remained unchanged at 3.92%, its lowest since early November.
Treasury yields started the day higher heading into Tuesday afternoon. But the Fed’s report altered the picture dramatically.
The 10-year Treasury yield showed some incredible flexibility. It rose five basis points to 2.40%, plummeted at one point to 2.03%, only to finish the day eight basis points lower, at 2.27%. It reached its lowest level since Jan. 15, 2009.
The two-year Treasury yield continues to push the record ever lower. It closed down six basis points at 0.21%.
The 30-year yield dropped two basis points to 3.71%, a level not seen since Sept. 28.
Muni-Treasury ratios are all extremely cheap, and favorable at the two-year, 10-year, and 30-year levels when compared to their respective calendar-year averages. But traders say they are meaningless, as nominal rates persist in discouraging retail investors from participating.
Market pros identify extremely light supply as a significant reason behind falling muni yields. This week, the situation likely will get worse. The industry predicts that municipal bonds sold this week will total $2.25 billion versus a revised $3.24 billion last week.
On the day’s negotiated docket, Ramirez & Co. priced for retail $225 million of Puerto Rico Public Buildings Authority government facilities revenue bonds, Series S. The bonds are rated Baa1 by Moody’s Investors Service, triple-B by Standard & Poor’s and BBB-plus by Fitch Ratings.
Yields range from 4.65% with a 5.75% coupon in 2022 to around 5.786% with a 5.75% coupon in 2039. Credits in 2041 were not offered to retail.
RBC Capital Markets priced $91.7 million of Austin Independent School District, Travis County, Texas, unlimited tax refunding bonds. The bonds were rated Aaa by Moody’s Investors Service and AAA/AA-plus by Standard & Poor’s and Fitch.
Yields range from 0.229% with a 2.00% coupon in 2012 to 4.19% with a 5.00% coupon in 2036. Demand was such that yields fell up to three points at the short end within the first two hours of pricing.
On the competitive side, Bank of America Merrill Lynch won $100 million of Lincoln West Haymarket Joint Public Agency, Nebraska, general obligation facility bonds Series 2011. The bonds are rated Aa1 by Moody’s and triple-A by Standard & Poor’s.
Yields range from 2.58% with a 5.00% coupon in 2021 to 4.37% with a 4.25% coupon in 2036. Debt in 2042 was sold, but not available.
