Market Close: Munis Rally Amid Trading Surge

Municipal bond yields fell again Thursday, coming off record trading volume earlier in the week, following a three-day selloff that had left yields nearly 60 basis points higher.

Yields fell as much as eight basis points as issuers including Phoenix Civic Improvement Corp. came to market to take advantage of demand from retail investors that has surged since the selloff.

“Who knows how long this will last but 5s at par will be gone soon,” a Chicago trader said. “Most everything is back above par.”

BondDesk Group counted a record of more than 11,590 trades, or $525 million of par value on Tuesday.

“This data shows how important individual investors are in the municipal space,” said John Bagley, president at BondDesk Trading. “There was a lot of buying of 5s on the long end right around par. And that helped put a floor in the market because the institutional accounts had to sell. But dealers could find the right bonds and realize it was something that would appeal to individual buyers and they started coming in waves. If individual buyers had not shown up, the market could have suffered even more significant losses.”

In Tuesday’s all-time record trading activity, there were nearly 4 buy trades to every sell trade with a median yield of 4.17%.

Wednesday was the second-highest for the week at 10,578 trades. The ratio of buy trades to sell trades fell to 3.7 as the median yield fell to 4.06%.

On Monday, June 24 – the final day of a three-day selloff – there were 9,409 trades and a 3.4 buy to sell ratio. The median yield traded was 4.34%, the highest in June.

“While bid wanteds on our platform are nearing historic high levels above 10,000 per day, a sign of major selling pressure, there were almost five investor buys for every sale by investors this past week, indicating that retail investors are jumping into the market to take advantage of higher rates,” Bagley said.

According to the Municipal Securities Rulemaking Board, the average amount of trades over the last 30 days was 44,000. Trading spiked to 65,147 on Tuesday and 60,592 trades on Wednesday. Analysts from Interactive Data said volume moved higher Thursday as the rally gained more participants.

“One mutual fund estimates that there is an estimated $10 trillion in cash or cash equivalents sitting on the sideline,” said analysts at Interactive Data. “With municipals near record high percentages to Treasuries, along with the ready cash many investors have, experts expect to see capital flow to municipals.”

Traders said the market felt seven to nine basis points stronger on Thursday.And while the selloff was painful, traders said they are looking forward to a higher interest rate environment. “The market needed this,” the Chicago trader said. “It’s a new landscape and a new rate environment brings more people into the market.”

A New York trader said that market felt better Thursday morning. “The 10-year area should be a good spot today,” he said. “It’s about five to six basis points stronger in that area.”

While most of the new deals priced in the primary Wednesday to take advantage of a 20 basis-point drop in yields, a few borrowers tapped the market Thursday.

RBC Capital Markets priced $329.3 million of  the Phoenix transit excise tax revenue refunding bonds, rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s.

Yields ranged from 0.80% with 3% and 5% coupons in a split 2015 maturity to 2.57% with 4% and 5% coupons in a split 2020 maturity. Bonds maturing in 2014 were offered via sealed bid.

Siebert Brandford Shank & Co. priced $221.6 million of Metropolitan Washington Airports Authority airport system revenue and refunding bonds. The bonds are rated A1 by Moody’s and AA-minus by Standard & Poor’s and Fitch Ratings.

Yields on the first series of $210.3 million of bonds subject to the alternative minimum tax, ranged from 2.17% with a 4% coupon in 2018 to 4.91% with a 5% coupon in 2043. The bonds are callable at par in 2023.

Bonds on the second series of $11.3 million yielded 2.45% with a 3% coupon in 2020, 2.73% with a 5% coupon in 2021, and 3.01% with a 5% coupon in 2022.

In the secondary market, trades compiled by data provider Markit showed strengthening. Yields on California’s Golden State Tobacco Securitization Corp. 5s of 2033 slipped 14 basis points to 6.60% and Kentucky State Property and Buildings Commission 5s of 2021 fell nine basis points to 2.88%.

Yields on Los Angeles County Public Works Financing Authority 5s of 2029 fell four basis points to 4.15% and yields on Triborough Bridge and Tunnel Authority 5s of 2038 fell three basis points to 4.12%.

Thursday, yields on the Municipal Market Data scale ended as much as eight basis points lower. The 10-year yield slid five basis points to 2.56% and the 30-year yield dropped eight basis points to 3.83%. The two-year was steady at 0.50% for the second session.

Treasuries were stronger Thursday. The benchmark 10-year yield slipped seven basis points to 2.48%, closing below 2.50% for the first since the previous Thursday. The 30-year yield dropped four basis points to 3.54% and the two-year yield fell three basis points to 0.36%.

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