Municipal bonds weakened as the third quarter started, leaving traders to look to seasonal reinvestment and non-traditional buyers to help offset concerns over Puerto Rico credits.
"We're expecting a good two way flow here," a trader in Chicago said. "We're starting a new quarter and expecting more volume and yields to move. We don't expect the market to go down continually."
Yields on munis maturing in three to four-years rose two basis points and yields maturing in five-to-12 years increased as much as three basis points. Yields on bonds maturing beyond 2028 climbed as much as two basis points, according to the Municipal Market Data's triple-A scale, while bonds maturing in 2015 were steady.
According to the Municipal Market Advisor's 5% triple-A scale, the 30-year yield and the 10-year benchmark climbed two basis points to 3.45% and 2.27%, respectively. The two-year note held steady at 0.31%.
Treasuries mostly weakened Tuesday, with the 30-year yield climbing five basis points to 3.40% and the 10-year benchmark jumping four basis points to 2.56%. The two-year note was unchanged at 0.47% from Monday's market close.
While several of the larger deals on the week's light calendar of issuance came to market, traders said that the secondary was quiet with the exception of Puerto Rico's Electric Power Authority bonds. PREPA yields have surged after the commonwealth enacted a law allowing public corporations to restructure their debt.
Moody's Investors Service downgraded PREPA bonds to Caa2 from Ba3. The commonwealth of Puerto Rico was pushed down four notches to B2 from Ba2 and the Puerto Rico Aqueduct and Sewer Authority was knocked down to Caa1 from Ba3.
"PREPAs are having a slow motion reaction," a New York trader said. "It's the peak of the summer doldrums. There will be a bigger reaction after the Fourth of July weekend."
To PREPA was expected to make a payment for its debt service on Tuesday, averting a default.
The money to pay its debt was said to be in the hands of the trustee, US Bank NA,, though no announcement was made on whether the transaction would occur.
"If there's weakness in the market you may see crossover buyers," the New York trader said. "Retail has a mentality that the government may not let them do anything that's harmful. Anyone that's been in the market knows that's not something to rely on."
The most actively traded PREPA CUSIP, 5.25s of 2029, traded 10 times, according to data analysis provided by Municipal Bond Information Services. The issuer's yields in the secondary reached a high of 172.451% Tuesday morning, on a separate CUSIP of PREPA 3s of 2015.
"Yields are a mixed bag; that's why we can't determine where things are going," the New York trader said. "Insured bonds should be fine all round. Uninsured bonds further out may experience volatility."
On Tuesday afternoon a separate CUSIP of 6.125s of 2040 traded at 15.246%.
July 1 means maturing debt and coupon payments may spur demand as investors reinvest their cash.
"Folks have to remember that you can't always count on reinvestment demand coming back into the market," a trader in Pennsylvania said. "If you look at last year, despite June and July being strong in terms of maturity and coupon payments, the rising rates had a lot of investors sitting on the sidelines. Right now, we're seeing reinvestment demand into munis, but it shouldn't be viewed as a given."
New issuance was higher this June at $34 billion, compared to last year's $26 billion, the first time this year that a month surpassed the issuance for the same period last year.
"Right now is an ideal time for issuers to come into the market, simply because there is some stability if not strength on the rate front," John Dillon, managing director at Morgan Stanley Wealth Management said. "There is a large amount of redemptions in the market as we head into the summer."
JPMorgan Securities priced $347.4 million of Dallas Independent School District unlimited tax refunding bonds at attractive buying cost investors said. Yields ranged from 0.12% with a 1% coupon in 2015 to 0.95% with a 5% coupon in 2034.
"One of the interesting deals is the charter school deal," a second New York trader said. "That's going to get some interesting spread in the plus-29 to plus-40 range."
The bonds are callable at par in 2024 except the 2034 maturity, which is callable at par in 2015. The deal is rated Aa1 by Moody's and AA-minus by Standard & Poor's.
Wells Fargo Securities priced $200 million of Los Angeles Department of Water and Power revenue bonds. Yields ranged from 0.53% with a 4% coupon in 2017 to 3% with a 5% coupon in 2029. The bonds are callable at par in 2024.
The deal is rated Aa3 by Moody's, and AA-minus by both S&P and Fitch Ratings.
Raymond James priced $101.7 million of Houston Higher Education Finance Corporate revenue and refunding bonds.
Yields ranged from 0.25% with a 1.50% coupon in 2015 to 4.07% with a 4% coupon in 2044. The bonds are callable at par in 2024.The deal is rated BBB by S&P.
"Broker-dealers are starved for quality product due to low new issue volume and big name borrowers are taking advantage, bringing competitive deals to market," the Chicago trader said. "Broker-dealers have to put their best foot forward to get access to the bonds."
Goldman Sachs won the bid for $554.5 million of Alabama Public School and College Authority capital improvement refunding bonds with a true interest cost of 2.4846%, largest deal of the week.
Yields ranged from 1.26% with a 5% coupon in 2019 to 2.80% with a 5% coupon in 2027. The bonds are callable at par in 2024.
"Yields were just off the scale in a weaker market," the trader based in Chicago said. Referring to the 2.80% yield, he said, "That's a good number. These are good results for the borrower for sure."
The deal is rated Aa1 by Moody's, AA by S&P and AA-plus by Fitch.
Jefferies won the bid for $450 million of Commonwealth of Massachusetts general obligation bonds on Tuesday with a true interest cost of 3.2923%, bringing narrow spreads to the market.
"The Massachusetts deal's spreads are too tight," a second New York trader said.
Yields ranged from 2.05% with a 5% coupon in 2022 to 3.27% with a 5% coupon in 2031.
"It has pretty tight spreads," the Chicago trader said. "It's one of those headline-strong names. People need product in Massachusetts and so they will pay a good number for it."
The bonds are callable at par in 2022. The deal is rated Aa1 by Moody's, and AA-plus by both S&P and Fitch.
