NEW YORK – The tax-exempt market rallied for the fifth consecutive trading session as limited supply appeared to create more demand and allowed underwriters the chance to unload blocks of leftover bonds from previous deals.
After Tuesday’s rally, the 10-year and 30-year yields hit lows not seen since March 13 when the sell off began.
“It looks like a fifth day of rallying,” a New York trader said. “I am seeing some buying here and there. But we need rates to go higher to get more money for your bonds.”
He added if rates go much lower, “people would rather put money in equities to get more for their money.” As munis rally, volume will also continue to fall as people look to put their money to work elsewhere.
A second New York trader said munis were also gaining Tuesday. “It is certainly stronger today,” a New York trader said. “Supply is very low. It’s under $4 billion this week.”
He added that munis are following Treasuries higher and in some areas, munis are outperforming Treasuries. “The belly of the curve got killed the past few weeks but it’s outperforming today.”
Munis were much stronger Tuesday, according to the Municipal Market Data scale. Yields inside three years were steady while the four- and five-year yields fell two basis points. Yields on the six- to 13-year plummeted between five and eight basis points while yields outside 14-year fell three and four basis points.
On Tuesday, the two-year yield finished steady at 0.36% for its eighth consecutive trading session. The 10-year yield dropped six basis points to 2.08% while the 30-year yield closed down three basis points to 3.37%.
Treasuries rallied. The two-year yield fell three basis points to 0.33% while the 30-year dropped two basis points to 3.30%. The benchmark 10-year yield saw the biggest move, falling five basis points to 2.19%.
Data compiled by Markit shows munis were stronger across the board as credit spreads tightened. In a sample of 11 CUSIPS, all bonds had lower yields on Tuesday. Pennsylvania general obligation 5s of 2022 fell to 2.34% while Ohio higher education GO 5s of 2023 fell to 2.582%. Wisconsin 5s of 2021 fell to 2.43% while California 5s of 2022 dropped to 3.034%.
In the primary market, Wells Fargo priced for retail $200 million of Rochester, Minn., health care facilities revenue bonds for the Mayo Clinic. The bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s. Pricing details were not yet available.
Wells Fargo priced $123.2 million of Arizona Board of Regents tax-exempt and taxable bonds for the University of Arizona. Pricing was not available by press time.
In the competitive market, PNC Capital Markets won $120 million of Temple University, Pa., short-term notes, rated M1G-1 by Moody’s. The bonds yielded 0.21% with a 1.25% coupon.
Wells Fargo won the bid for $98 million Cobb County, Ga., short-term notes rated SP-1-plus by Standard & Poor’s and F-1-plus by Fitch Ratings. The bonds yielded 0.12% with a 1.5% coupon
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming.
A dealer bought from a customer Georgia 5s of 2017 at 0.68%, 13 basis points lower than where they traded the week prior.
Another dealer bought from a customer New Jersey’s Tobacco Settlement Financing Corp. 4.5s of 2023 at 5.25%, five basis points lower than where they traded the week before.
A dealer sold to a customer Illinois 5s of 2034 at 4.46%, three basis points lower than where they traded the week prior.
A dealer bought from a customer Durham, N.C., Capital Financing Corp. 5s of 2030 at 3.77%, one basis point lower than where they traded a week before.
According to analysts at Markit, the municipal market is a credit market and relies less on ratings. “The potential opportunity is in credits that have high spreads and low ratings and the potential risk is in credits with low spread and high ratings,” an analyst at Markit said.
For example, similarly rated bonds, like Illinois and California, trade with very different spreads. Illinois, which is rated A-plus by Standard & Poor’s and A2 by Moody’s, trades with a spread of 144 basis points through the MMD scale and has an average spread of 176.2 basis points. California, which is rated A-minus by Standard & Poor’s and A1 by Moody’s, has a spread of 88 basis points through the MMD scale, and an average spread of 104.2 basis points.
Similarly, Nevada and New York City bonds are rated AA by Standard & Poor’s and Aa2 by Moody’s but trade at different spread levels. Nevada has a spread of 65 basis points through the MMD scale and an average of 67.6 basis points while New York City trades 46 basis points through MMD and trades at an average of 55.2 basis points.
Since munis started strengthening last Wednesday, muni-to-Treasury ratios rose as munis underperformed Treasuries and become comparatively cheaper. The five-year muni-to-Treasury ratio jumped to 94.4% from 85% last Tuesday. The 30-year ratio increased to 102.1% from 100.3% on Tuesday.
The 10-year ratio fell to 95.1% from 98.3% when munis started weakening last Wednesday as munis outperformed Treasuries and became comparatively more expensive.
The slope of the curve widened to 126 basis points from its 12-month low of 114 basis points last Tuesday before munis started rallying.
