The tax-exempt market traded weaker for a second session on Tuesday as total volume fell and market participants prepared for new deals to price in a holiday-shortened week.
Following a three-day Veteran’s Day holiday, the secondary market was quiet even as Puerto Rico and Chicago general obligation bonds made headlines.
Reports of hedge fund investors and other cross over buyers gobbling up Puerto Rico debt wasn’t enough to push the market firmer. In one CUSIP of Puerto Rico 5.75s of 2041, over $20 million exchanged hands by morning trading. Yields on a block-size interdealer trade yielded 8.2%, up from 8.1% on Friday. A customer bought from a dealer the same CUSIP at 8.18%, up from 8.10% on Friday. A customer sold to a dealer bonds yielding 8.2%, up from 8.12% on Friday.
Trading of Puerto Rico GOs was down 7.4% from the average of the previous five Tuesdays with less than $50 million swapping hands. Trading of Puerto Rico Sales Tax Financing Corp. bonds fell 23% from the average of the previous five Tuesday with almost $100 million traded.
“Dealers are getting more calls from retail clients asking if Puerto Rico is a buy,” said Dan Toboja, vice president at Ziegler Capital Markets. “But to a large extent that trade is gone. The 10% yield trade was awhile ago, but it’s in the news more now and that is just now making it’s way to some retail.”
Chicago, another credit that is suffering, saw less reaction in the secondary markets following the three-notch downgrade of its GO debt by Fitch Ratings on Friday to A-minus. No institutional block-size trades of the GOs traded by Tuesday afternoon.
“Most people are focused on new issues,” Toboja said. “The new issues are going to be lighter than a full week just because people don’t want to bring deals in a holiday-shortened week so it’s adding up to not much going on today. When deals start pricing tomorrow the market should pick up when people look at their cash positions.”
Volume dropped nearly 20% at $4.81 billion from the average of the previous five Tuesdays. “It’s a bit cheaper on the long-end,” a Chicago trader said. “Outside 2018 it’s two basis points weaker. In the general market, the yield curve keeps getting steeper and steeper.”
The most actively traded name in the general market was California GOs with $130.15 million changing hands.
In the primary market, several of the week’s new issues priced for retail investors amid an overall drop in supply. The market can expect $5.04 billion in new deals, down from last week’s revised $6.34 billion. The negotiated market may shrink to $3.54 billion from last week’s revised $5.13 billion. On the competitive calendar, $1.50 billion should be auctioned, up from last week’s revised $1.21 billion.
M.R. Beal priced for retail $375 million of New York City Municipal Water Finance Authority water and sewer system second general resolution bonds, rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch.
The bonds yielded 4.78% with a 4.625% coupon and 4.67% with a 5% coupon in a split 2046 maturity. A portion of the bonds maturing in 2046 were not offered for retail. The bonds are callable at par in 2023.
Bank of America Merrill Lynch priced for retail $277.7 million of Virginia Transportation Board federal transportation grant anticipation revenue notes, rated Aa1 by Moody’s and AA by Standard & Poor’s. Yields ranged from 0.26% with a 4% coupon and 0.41% with a 5% coupon in a split 2015 maturity to 4% priced at par in 2028. Bonds maturing in 2014 were offered via sealed bid and portions of bonds maturing between 2025 and 2028 were not offered for retail. The bonds are callable at par in 2023.
Two issuers in Missouri are also expected to price $262.1 million total. The Curators of the University of Missouri released indications of interest on $161.3 million of taxable bonds and Missouri Environmental Improvement and Energy Resources Authority priced for retail $100.8 million of revenue bonds.
In the secondary market, trades compiled by data provider Markit showed weakening. Yields on Iowa’s Tobacco Settlement Authority 5.375s of 2038 and Chicago 5s of 2020 rose four basis points each to 7.44% and 4.07%, respectively.
Yields on Massachusetts School Building Authority 5s of 2028 increased three basis points to 3.67% and Hawaii 4s of 2018 rose two basis points to 1.32%.
Yields on New York City Transitional Finance Authority 5s of 2039 rose two basis points to 4.47% and Forsyth County, Ga., School District 5s of 2025 increased one basis point to 2.99%.
Yields on California 5.25s of 2029 and COFINA. 5s of 2021 rose one basis point to 4.15% and 5.07%, respectively.
On Tuesday, the triple-A Municipal Market Data scale ended as much as four nine basis points weaker after nearly 10 basis point jump in yields on Friday. The 10-year yield rose four basis points to 2.62% and the 30-year yield rose one basis point to 4.16%. The two-year was steady for the 10th session at 0.34%.
Yields on the Municipal Market Advisors benchmark scale rose as much as five basis points Tuesday after an eight basis point increase Friday. The 10-year yield rose five basis points to 2.77% and the 30-year yield rose two basis points to 4.38%. The two-year yield fell one basis point to 0.48%.
Treasuries were weaker. The benchmark 10-year yield rose three basis points to 2.78%. The two-year and 30-year yields increased two basis points each to 0.34% and 3.86%, respectively.
And though the past week was weaker for fixed-income markets, munis outperformed Treasuries. “Municipal valuations still closed last week slightly higher relative to Treasuries,” said analysts at LPL Financial, adding that the average 10-year triple-A muni-to-Treasury ratio was 98% and the 30-year ratio was 113%. “The 10-year triple-A municipal yield ratio has rarely held below 100% over the past six months, and municipals may remain volatile as they move in sympathy with Treasuries while taper fears remain elevated.
“As the holidays approach, an illiquid market may also foster volatile markets for municipal bonds until tapering uncertainty is resolved,” the analysts wrote. “Within the municipal market, high-yield bonds outperformed as the sector continued to play catch up after lagging the post-September Federal Open Market Committee meeting rebound.”