NEW YORK — Yields in the municipal market rose dramatically Wednesday as the expectation that tbe Build America Bond program will expire at year's end spurred issuers to bring more of the taxable product to market.
Traders said tax-exempt yields were weaker by about 15 basis points in maturities 10 years and longer as an excess of supply worked to cause the weakness, in tandem with a Treasury rout exacerbated by a dovish statement from the Federal Open Market Committee.
"The story today is steepening and cheapening," a trader in New York said. "Inside of 10 years, it's not too bad, but past that, we're significantly weaker. On the long end, we're probably down 15 basis points or so. There is just very little demand out there."
JPMorgan priced $1.2 billion of debt for New York City, including $902 million of taxable BABs.
The BABs mature from 2018 through 2024, with term bonds in 2031 and 2037. Yields range from 4.787% in 2018, or 3.11% after the 35% federal subsidy, to 6.271% in 2037, or 4.08% after the subsidy. The bonds were priced to yield between 140 and 250 basis points over the corresponding Treasury yields. The bonds feature an unspecified make-whole call, except bonds maturing in 2031, which are callable at par in 2020.
New York City also sold $300 million of Series G and H tax-exempt bonds.
Bonds from the $259.4 million Series G mature from 2012 through 2020, with yields ranging from 0.92% with a 3% coupon in 2012 to 3.79% with a 5% coupon in 2020. Yields were increased 10 to 18 basis points from Monday's retail pricing. These bonds are not callable.
Bonds from the $40.7 million Series H mature from 2011 through 2020, with yields ranging from 0.92% with a 4% coupon in 2012 to 3.79% with a 4% coupon in 2020. Bonds maturing in 2011 were decided via sealed bid. Yields were increased 10 to 18 basis points from Monday's retail pricing. These bonds are not callable.
Besides its negotiated sale, the city also competitively sold $148 million of taxable GO bonds to Citi, with a true interest cost of 3.37%.
The bonds mature from 2012 through 2017, with yields ranging from 3.17% in 2015 to 4.13% in 2017, all priced at par. Bonds maturing from 2012 through 2014 were not formally re-offered.
The credit is rated Aa2 by Moody's Investors Service and AA by both Standard & Poor's and Fitch Ratings.
The Municipal Market Data triple-A 10-year scale widened 15 basis points Tuesday to reach an eight-month high of 3.24%, the highest since June 26, 2009; the 20-year scale increased 18 basis points to a 21-month high of 4.51%, the highest since March 31, 2009; and the scale for 30-year debt rose 15 basis points to a 21-month high of 4.69%, the highest since March 27, 2009.
"You have all that BAB supply out there, and quite a bit more to come before the year is out, but right now, we're getting hammered with bid-wanteds and the supply isn't really helping anything," a Los Angeles trader said. "None of the deals we've seen today have gotten a great reception as far as I can tell, and that's not likely to change with anything else that's expected this week."
A second New York trader said that market participants are operating under the assumption that the program is dead as of Jan. 1, but that he would attribute Tuesday's sell-off to more than simply an uptick in new issuance ahead of the deadline.
"Supply is part of it, but Treasuries were absolutely routed across the board," the trader said, "and it only got worse after the Fed statement."
In its final meeting of 2010, the FOMC kept its federal funds rate target at a range of 0% to 0.25% and kept its QE2 Treasury purchase program unchanged at a buying pace of $75 billion per month, helping to push rising Treasury yields even higher.
"Since QE2 launched in November, the rate markets have been the anti-graffiti walls fighting back against Fed policymakers," wrote Guy LeBas, chief fixed income strategist at Janney Capital Markets. "It appears the bond buying spree hasn't done all that much to cause inflation, but rising real yields mean that the policy is proving neither reflationary nor stimulative. While we still believe a final amount of QE2 purchases in the $1 trillion area would be more appropriate to stave off deflation risks, this program may end up as little more than a teaching session for the Fed, the lesson being 'don't fight the markets.'"
In the Treasury market, the benchmark 10-year note was quoted recently at 3.44% after opening at 3.27%. The 30-year bond was quoted recently at 4.51%, after opening at 4.40%. The two-year note was quoted recently at 0.64% after opening at 0.58%.
Tuesday's triple-A muni scale in 10 years was at 93.9% of comparable Treasuries and 30-year munis were at 106.4%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 112.8% of the comparable London Interbank Offered Rate.
Elsewhere in the new-issue market Tuesday, Jefferies & Co. priced $388.1 million of special obligation refunding notes for Massachusetts, which mature from 2011 through 2015. Yields range from 0.80% with a 2% coupon in 2012 to 1.86% with a 4% coupon in 2015. Bonds maturing in 2011 were decided via sealed bid. Yields were increased five to 11 basis points from Monday's retail pricing. The bonds are not callable.
Massachusetts is also slated to sell $576.2 million of transportation fund revenue bonds Wednesday in a JPMorgan-led deal. The Series 2010 A accelerated bridge program debt consists of taxable BABs and direct-pay recovery zone economic development bonds.
The credit is rated Aa1 by Moody's. AAA by Standard & Poor's, and AA-plus by Fitch.
In economic data released Tuesday, producer prices jumped 0.8% in November, led by a 2.1% increase in energy goods prices, while core prices, which exclude food and energy, increased 0.3% on rising prices for new autos.
Economists expected producer prices would rise 0.6% and core prices would increase 0.2%, according to the median estimate from Thomson Reuters.
Retail sales increased 0.8% in November as sales excluding autos jumped 1.2%, the strongest gain since March.
Total October sales increased 1.7%, revised higher from the 1.2% gain reported last month. It was the strongest month for retail sales since March.
Retail sales excluding autos grew 0.8%, following a similar gain last month. A core reading of retail sales, excluding autos, gas and building materials, increased 0.9% in November.
Economists polled by Thomson Reuters expected retail sales and sales excluding autos to increase 0.6% for the month, according to the median estimate.
Business inventories increased 0.7% in October. Business sales increased 1.4% for the month. Retail inventories fell 0.6%.
Economists expected business inventories would rise 1.0% for the month, according to the median estimate from Thomson Reuters.
Visible Supply
The Bond Buyer's 30-day visible supply fell $179.6 million to $16.604 billion. The total is comprised of $2.456 billion of competitive bonds and $14.148 billion of negotiated bonds.
Previous Session's Activity
The Municipal Securities Rulemaking Board reported 47,978 trades of 16,745 issues for volume of $11.36 billion. Most active was New Brunswick, N.J., 8.32s of 2039 that traded 545 times at a high of 104.500 and a low of 100.100.
