NEW YORK — Low nominal yields continued to pin the municipal market to the mat Monday, leaving little interest or activity in the secondary.
Traders saw little of anything out for the bid, according to a trader in Los Angeles.
“It’s been extremely quiet,” he said. “Everybody hates the yields, hates the market. They’ve been sitting in these low nominal yields for a long period of time; it’s tough to get stuff done. There’s nothing compelling out there in the secondary at the moment.”
A trader in Chicago agreed. Typically by midday, he has at least eight pages of bids-wanted. Today he had just one page.
Yields didn’t budge throughout the day’s session, according to the Municipal Market Data scale. Tax-exempt yields ended last week unchanged, as well.
The benchmark 10-year yield and the 30-year yield closed the day steady at 1.78% and 3.09%, respectively. The two-year yield remained at 0.31% for the 24th consecutive trading session.
Treasury yields ended the day’s session mixed. The benchmark 10-year Treasury yield climbed four basis points to 1.75%.
The 30-year yield, which finished flat on Friday, has budged little through the day and inched up one basis point to 2.81%. The two-year yield slipped one basis point to 0.30%.
Despite what many traders perceive to be a holiday-shortened week, the industry expects a decent increase in the primary, with $9.19 billion expected to reach the market. That compares with $6.83 billion that arrived last week.
On Monday, firms went around trying to drum up some business for their upcoming deals, the trader in Los Angeles said. “They’re beating the bushes,” he said. “That’s where the focus is. But, until they get priced and put in the marketplace to see how they do, it’s just quiet. “
Bank of America Merrill Lynch, in the week’s biggest deal, priced $800 million of New York City general obligation bonds for retail in two series. The bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
Yields for the first series, $49.4 million, ranged from 0.50% with a 2.00% coupon in 2014 to 2.60% with a 3.00% coupon in 2024. Credits maturing in 2012 and 2013 were offered in a sealed bid. The bonds are callable at par in 2022.
Yields for the second series, $750.6 million, ranged from 0.50% with coupons of 4.00% and 5.00% in a split maturity in 2014 to 3.17% with a 4.00% coupon in 2030Credits maturing in 2013 were offered in a sealed bid. Those maturing in 2023 through 2027, 2029, and 2031 and 2032 were not offered to retail. The bonds are callable at par in 2022.
In other retail offerings, Roosevelt & Cross priced $217 million of New York State Dormitory Authority school districts revenue bond financing program revenue bonds in five series. The bonds in the first series, $120.3 million, are rated AA-minus by Standard & Poor’s and A-plus by Fitch. Portions of debt maturing from 2013 through 2017 are back by Assured Guaranty Municipal Corp. at A-plus.
Yields for the series ranged from 0.50% with a 3.00% coupon in a split maturity in 2013 to 4.04% with a 4.00% coupon in 2038. Other credits maturing in 2013 were offered in a sealed bid.
There were no retail offers for debt maturing in certain maturities in 2025 and 2026. The bonds are callable at par in 2022.
The bonds in the second series, $21.9 million, are rated Aa2 by Moody’s and A-plus by Standard & Poor’s and Fitch. Yields for the series ranged from 0.40% with a 2.00% coupon in a split maturity in 2013 to 3.44% with a 3.25% coupon in 2031. Other credits maturing in 2013 were offered in a sealed bid. The bonds are callable at par in 2022.
The bonds in the third series, $27.1 million, are rated Aa3 by Moody’s and A-plus by Standard & Poor’s and Fitch.
Yields for the series ranged from 0.50% with a 2.00% coupon in a split maturity in 2013 to 3.54% with a 3.375% coupon in 2031. Other credits maturing in 2013 were offered in a sealed bid. The bonds are callable at par in 2022.
The bonds in the fourth series, $37 million, are rated AA-minus by Standard & Poor’s and A-plus by Fitch. Portions of debt maturing in 2013 and 2014 are back by Assured Guaranty at A-plus.
Yields for the series ranged from 0.55% with a 2.00% coupon in 2013 to 4.10% with a 4.00% coupon in 2041. The bonds are callable at par in 2022.
The bonds in the fifth series, $10.7 million, are rated AA-minus by Standard & Poor’s and A-plus by Fitch. Portions of debt maturing from 2013 through 2017 are back by Assured Guaranty at A-plus.
Yields for the series ranged from 0.50% with a 2.00% coupon in 2013 to 4.04% with a 4.00% coupon in 2039. The bonds are callable at par in 2022.
But the ramp up in issuance, though sizable, still won’t pace demand, the trader in Chicago said. Principal and coupon payments in the coming months should leave too much money in investors’ hands, relative to the primary volume.
“We’re not supposed to have huge volume, certainly not to replace the rollover,” the trader in Chicago said. “We have to see where it goes, what people do with that money, whether it goes into bonds or stocks. We’re cheap to Treasuries. The long Treasury is around 2.79% in 2042. You can buy all kinds of triple-A bonds cheaper than a 2.79% [Treasury bond].”
Last week’s selloff pushed muni ratios to Treasuries to ranges that will be more attractive to crossover investors, Peter DeGroot, an analyst JPMorgan, wrote in a research report. Ratios in 10 years and 30 years spiked to 105% and 111%, respectively, he wrote.
And over the past five years, there have been four periods in particular where 10 year ratios have risen above 100%. Each period is associated with either new period lows in yields or with specific events which led to muni underperformance to Treasuries.
“Elevated ratios are likely to persist for a short period given low yields, the size of next week’s calendar, and the inclusion of some larger high-grade competitive deals,” DeGroot wrote. “We expect that this will give way, however, to strong seasonal performance for the municipal market in July-August when net supply is estimated to be -$26 billion versus a five-year average net supply of -$5.4 billion over these months.”
Crossover buyers, he added, therefore may see tax-exempts as a way to outperform taxable benchmarks and peers.
