The tax-exempt market ended with a mixed reaction Tuesday as institutional traders said the market was more active, while retail traders said the market appeared quiet.
Overall for the day, municipal bond yields ended flat to higher and traders noted many buyers are waiting for the market to cheapen up even more.
“We are really busy, but it’s just a lot of spinning wheels,” a Chicago trader said. “There is a lot of reluctance and things need to cheapen up. We chopped out most of our inventory a few weeks ago and it was a good trade for us. All the market has done is cheapen up and it needs to get a lot cheaper.”
And while buyers would be enticed to participant in the market if yields backed up further, he said the tone is too complacent right now. “Once people come back from vacation and realize what supply looks like in September, there will be a puking of bonds. Underwriters have had positions for two-and-a-half months, and you just can’t do that. As the underwriters come back from vacations and get realization, things will get squishy.”
Other traders noted the market was busy Tuesday. “It’s weaker,” a New York trader said. “But there is a little bit of trading going on.”
Still, not all traders noted an increase in activity and those in the retail market said it was quiet.
A retail trader located in the Southwest region said deals that priced targeted institutional investors, and so there was no incentive to push his retail buyers into the muni market right now.
The market “is not moving one way or the other and there isn’t enough activity to tell,” the trader said. “It barely has a pulse. It’s pretty quiet. I think people are winding up vacations and starting school” and these distractions are keeping buyers out of the market.
In the primary market, Texas auctioned $9.8 billion of tax and revenue anticipation notes, rated MIG-1 by Moody’s Investors Service, SP-1-plus by Standard & Poor’s, and F1-plus by Fitch Ratings.
JPMorgan won the bid for $5.22 billion of notes, which will yield 0.22% and 0.23% with a 2.5% coupon.
Citi won a $2 billion chunk at yields of 0.20%, 0.21%, and 0.23% with a 2.5% coupon.
Bank of America Merrill Lynch was awarded $1.05 billion at yields of 0.22%, 0.23%, and 0.24% with a 2.5% coupon.
Wells Fargo Securities won the bid for $1 billion at yields of 0.22%, 0.23%, and 0.24% with a 2.5% coupon.
RBC Capital Markets had the high bid on $325 million of the notes, at yields of 0.21% and 0.24% with a 2.5% coupon.
Piper Jaffray won the bid for $100 million at a yield of 0.23% with a 2.5% coupon.
Goldman, Sachs & Co. won an $80 million chunk at yields of 0.23% and 0.24% with a 2.5% coupon.
Morgan Stanley won the bid for $25 million at a yield of 0.24% with a 2.5% coupon.
JPMorgan priced for institutions $524.2 million of New York State Thruway Authority personal income tax revenue bonds, following retail pricing Monday. The bonds are rated AAA by Standard & Poor’s and AA by Fitch.
Yields ranged from 0.50% with 2% and 4% coupons in a split 2015 maturity to 3.00% with a 5% coupon in 2032.
The bonds are callable at par in 2021 except for credits maturing in 2022. From retail pricing, yields were lowered between two and four basis points on most maturities, and seven basis points on 2018 maturities.
Citi priced $366.9 million of Dallas waterworks and sewer system revenue refunding bonds, $106.9 million taxable and $260 million tax-exempt.
The credit is rated AAA by Standard & Poor’s. Pricing information was not available by press time.
On Tuesday, the 10-year Municipal Market Data yield jumped three basis points to 1.90% while the 30-year yield rose one basis point to 3.02%. The two-year closed at 0.29% for the 19th straight session.
Treasuries were weaker most of the day Tuesday and then rallied to finish stronger.
The benchmark 10-year yield fell one basis point to 1.81% while the 30-year yield dropped two basis points to 2.91%. During the day, yields were as high as 1.85% and 2.96%, respectively. The two-year yield ended one basis point higher at 0.30%.
In the secondary market, trades compiled by data provider Markit showed mostly weakening. Yields on Conroe, Texas, Independent School District 5s of 2018 jumped four basis points to 1.08%.
Yields on Lamar, Texas, Consolidated Independent School District 5s of 2022 and New York State Urban Development Corp. 5s of 2023 rose three basis points each to 2.06% and 2.38%, respectively.
Yields on Wisconsin 4s of 2030 increased two basis points to 3.08% while Tennessee Energy Acquisition Corp. 5.25s of 2023 rose one basis point to 4.13%.
While muni yields have backed up significantly over the past several weeks, many traders believe the market still needs to cheapen up. And compared to Treasuries, munis are still not cheap at these levels.
The trader in the Southwest said muni-to-Treasury ratios are lower than they’ve been during the summer and there is little incentive to push people into munis. “We are going to have to get cheaper.”
Indeed, muni-to-Treasury ratios have fallen throughout the summer as munis outperformed Treasuries and became comparatively more expensive. The five-year ratio dropped to 96.7% on Tuesday from 117.7% on June 1.
The 10-year ratio fell to 105% from 199.9% at the beginning of June and the 30-year ratio plummeted to 103.8% from 120.2% at the start of June.
Analysts at Trident Municipal Research say the recent decline in muni yield to Treasury yield ratios presents an opportunity to take profits. “Investors should take profits on municipal-Treasury yield ratio exposure and look to re-establish positions after Labor Day.” But they cautioned, “Light new issue supply and higher Treasury rates could drive yield ratios lower.”
On Wednesday’s economic calendar, existing home sales are expected to be released. Also, the minutes of the Federal Open Market Committee’s latest meeting should be released.
