NEW YORK – The tax-exempt market continued to lose ground for its third consecutive trading session as the primary market couldn’t get enough action to rally bonds. Bonds prices were cut on new deals from Monday’s retail order periods and the secondary market showed weakening.
And while bonds are weaker, traders said deals were well received.
“We’re not far off of the recent all time lows and the issuers are benefiting,” said a trader in Connecticut. “Interesting, with absolute rates so low, investors are stepping out on the credit spectrum so credit spreads are tightening a bit. Luckily, overall supply is moderate so demand is expected to remain strong.”
The trader participated in a refunding deal Tuesday and “feedback has been great.”
“The market is still fairly quiet,” a New York trader said. “People have been selling since last week, but there’s still a bid out there. But not a good one.”
Munis were mostly steady to weaker Tuesday, according to the Municipal Market Data scale. Yields inside four years were mostly steady while yields between the five-year and 16-year jumped between and one and five basis points. Outside 17 years, yields were steady.
On Tuesday, the 10-year yield jumped five basis points to 1.84%. The 30-year yield was steady at 3.22%.
The two-year was the anomaly, as the yield fell one basis point to 0.29%, setting a new record low as recorded by MMD. The previous record of 0.30% was set Aug. 10.
Since the most recent rally began Jan. 24, muni yields fell as much as 22 basis points across the curve up until Friday. The losses Friday and this week on the 10-year have erased gains munis made since then.
Treasuries continued to weaken across the curve. The two-year yield rose two basis points to 0.26% while the benchmark 10-year yield soared eight basis points to 1.98%. The 30-year yield jumped six basis points to 3.15%.
If the muni market turns around and starts to show strength, some analysts are recommending using the opportunity to sell. “We advocated a selective approach to local credits in North Carolina, adding to a list that includes Rhode Island and Georgia where local issuers will bear the brunt of the decline of fiscal flexibility at the state level,” said analysts at Trident Municipal Research. “We would look at any general market strength this week as an opportunity to lighten up exposure – portfolio managers should have offerings in the market on any holdings in these areas.”
In the primary market, several big deals priced Tuesday.
Goldman, Sachs & Co. priced for institutions $276.5 million of Shelby County, Tenn., general obligation refunding bonds, rated Aa1 by Moody’s Investors Service, and AA-plus by Standard & Poor’s and Fitch Ratings.
Yields on the first series, $264.1 million of GO refunding bonds, ranged from 0.21% with a 2% coupon in 2013 to 2.75% with a 3.5% coupon and 2.64% with a 5% coupon in a split 2028 maturity. The bonds are callable at par in 2022 except for credits maturing in 2023 and 2024. Prices were cut two basis points on the long end from retail pricing Monday.
Yields on the second series, $15.1 million of special GO school refunding bonds, ranged from 0.21% with a 2% coupon in 2013 to 1.41% with a 4% coupon in 2019. Prices were cut three basis points on the long end from retail pricing Monday.
Citi priced $225 million of San Antonio Water System revenue refunding bonds, rated Aa1 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch.
Yields ranged from 0.40% with a 3% coupon in 2014 to 2.89% with a 4% coupon in 2028. Credits maturing in 2013 were offered via sealed bid. The debt is callable at par in 2022.
Wells Fargo priced $140.7 million of Conroe, Texas, Independent School District unlimited tax school building and refunding bonds. The credit is rated Aa2 by Moody’s and AA by Standard & Poor’s. Details were not yet available.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening.
A dealer sold to a customer Bay Area Toll Authority 7.043s of 2050 at 4.94%, nine basis points higher than where they traded Monday.
A dealer bought from a customer New York Liberty Development Corp. 5s of 2041 at 3.90%, eight basis points higher than where they traded last Friday.
Another dealer bought from a customer New York City Municipal Water Finance Authority 5s of 2045 at 3.83%, three basis points higher than where they traded Monday.
Another dealer bought from a customer Hawaii 5s of 2021 at 1.90%, one basis point higher than where they traded Monday.
Over the past week, muni-to-Treasury ratios have fallen as munis outperformed and because more expensive. The five-year ratio fell to 90.7% on Monday from 97.3% the week prior. The 30-year ratio fell to 104.2% from 106% the week before.
The 10-year spot has reversed, with the ratio increasing to 94.2% on Monday from 92.4% the week prior.
MMD’s Daniel Berger noted that all ratios increased on Monday. “They still have not yet reached levels with adequate value,” he said.
The slope of the yield curve continues to flatten. The 10- to 30-year slope fell to 143 basis points from 146 basis points the week before. The drop is a “a sharp decline
from the 172 basis point level seen five short weeks ago,” Berger said.
