The tax-exempt market ended slightly weaker Tuesday as traders looked to unload bonds before Wednesday’s Federal Open Market Committee announcement.
With uncertainty surrounding the Fed’s policy of continuing its $85 billion-a-month bond purchasing program, traders were hesitant to take on new positions and opted to sit on the sidelines.
"There is certainly a good amount of skittishness in anticipation of the Fed's tone regarding tapering," said Burt Mulford, portfolio manager at Eagle Asset Management. "If there is an indication of an increase in tapering or any surprise the market could react negatively. But it's my anticipation the Fed will do a little backpedaling and re-instill confidence that [Quantitative Easing] 3 is still intact and the Fed will remain large buyers of Treasuries to keep the economy moving forward."
If there is a selloff, munis should lag Treasuries, though support should remain intact. "The muni market has sold off relative to Treasuries and capture ratios are over 100%. Our anticipation is the market will firm going into July, which is a large reinvestment month."
Mulford said much of the bad news is already priced into the market after rates rose about 60 basis points in the last six weeks. "We have received an abundance of client calls concerning the selloff. Our response is that the market has overreacted to Fed commentary. We believe that the market will remain range bound for the next year. The challenge for munis is that 2011 and 2012 were very good years in terms of performance. When investors don't see consistent positive numbers they start getting fearful that the end is near. We don't believe that."
Some muni traders put transactions on hold Tuesday.
“The muni market is weird today,” a Chicago trader said. “It feels a little weaker but there are not a lot of offerings that are in the right realm. Customers are involved but it’s very selective. Everyone is waiting for the Fed. Dealers don’t want to take any risk and are going into tomorrow as light as possible.”
The recent selloff and uncertainty that forced yields higher was a big change for some traders. “You have an environment where over the past five to 10 years everything traders bought has come back,” this trader said. “They’ve never been in an environment where they’ve lost money. So everything is hoping the Fed will bring stability and munis will come back and they can keep their jobs.”
A New Jersey traded added: “It seems to be slowing down a bit today. We are all waiting for Bernanke and a read on which way the taper is going to happen.”
The few deals that did come in the primary market were priced at more attractive levels than the secondary.
“It’s still primary-market focused,” the New Jersey trader said. “New deals come at attractive levels and you can’t beat it. The secondary is a little wishy-washy. Everything in the secondary is more expensive.”
In the New York market, the primary was cheaper. New York City Municipal Water Finance Authority bonds priced for retail Monday and 4.25s of 2047 yielded 4.40%. In the secondary, New York City Transitional Finance Authority 4s of 2043 yielded 4.19%.
“It seems like the 4s at a discount are getting retail play because we haven’t seen those levels in a while and the 2s and 3s were decimated,” the trader said. “Most of the play is in the 4s or 4.5s.”
Citi priced for institutions $347.2 million of New York City Municipal Water Finance Authority water and sewer system second general resolution revenue bonds. The bonds are rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.
Yields ranged from 3.38% with a 5% coupon in 2028 to 4.40% with a 4.25% coupon and 4.25% with a 5% coupon in a split 2047 maturity. The bonds are callable at par in 2023. Yields on the 2028 maturity were lowered four basis points from retail pricing and yields on the 2035 maturity were lowered one basis point. Yields on the 2047 maturity with a 5% coupon were raised seven basis points from retail pricing.
In the competitive market, Wells Fargo won the bid for $157.6 million of New Mexico severance tax bonds, rated Aa1 by Moody’s and AA by Standard & Poor’s.
Yields ranged from 0.19% with a 5% coupon in 2014 to 2.15% with a 4% coupon in 2023. The bonds are callable at par in 2018.
In the secondary market, trades compiled by data provider Markit showed weakening.
Yields on California’s Golden State Tobacco Securitization Corp. 5.75s of 2047 and New Jersey Turnpike Authority 7.102s of 2041 rose three basis points each to 6.65% and 4.74%, respectively.
Yields on Omaha, Neb., Public Power District 5s of 2042 and California 5s of 2043 rose two basis points each to 3.85% and 4.17%, respectively.
Yields on Minnesota 5s of 2019 increased one basis point to 1.51%.
Yields on the Municipal Market Data scale ended as much as four basis points higher Tuesday. The 10-year yield increased one basis point to 2.24% and the 30-year yield rose three basis points to 3.53%. The two-year was steady at 0.31% for the fifth session.
Muni yields on the Municipal Market Advisors 5% scale closed as much as three basis points higher. The two-year and 10-year yields increased one basis point each to 0.39% and 2.34%, respectively. The 30-year yield rose two basis points to 3.64%.
Treasuries were choppy Tuesday. The benchmark 10-year yield increased one basis point to 2.19% while the 30-year yield fell one basis point to 3.35%. The two-year was steady at 0.27%.