NEW YORK – The tax-exempt market handled the year’s largest weekly new issuance fairly well as traders noted that even though yields rose, munis are still very expensive and demand remains strong.
“The music has stopped,” a Chicago trader said Friday afternoon. “People are recovering from the week. There is also a bunch of supply on the horizon and there wasn’t any deal this week that had to power to reprice the market. But next week, there is that deal.”
He added there are still a lot of balances left over from the past two weeks’ deals but “the paper in the pipeline is not moving.”
“Again, we discuss the asset class comparison and the total return that is perceived possible in equities versus munis,” he said. “Greed has taken over for fear in some ways. You see the Dow Jones Industrial Average at 13,000 and equity analysts talking up the stock market. How can you then justify getting 2% for 10 years?”
Munis were steady to weaker Friday, according to the Municipal Market Data scale, and for the week, yields also rose across the curve. The 10-year yield rose four basis points throughout the week while the 30-year yield rose two basis points throughout the week. The two-year was steady.
On Friday, the two-year yield ended at 0.26%, its record low first recorded by MMD on Feb. 16. The 10-year yield ended at 1.91% and the 30-year at 3.27% for the week.
Treasuries were stronger Friday. The two-year yield fell two basis points to 0.28% while the 30-year yield dropped three basis points to 3.12%. The benchmark 10-year yield fell four basis points to 1.99%.
The deal that stole headlines this week was $2 billion of California various-purpose general obligation refunding bonds.
“It’s rewarding to ease taxpayers’ burden in these tough economic and fiscal times,” said State Treasurer Bill Lockyer, noting the refunding deal will save $250 million in debt service payments. “With the state still fighting to keep its budget in the black, every bit of savings helps.”
In the primary market Friday, Bank of America Merrill Lynch priced for retail $150 million of Maryland general obligation bonds, rated triple-A by the rating agencies. Pricing details were not available by press time. Institutional pricing is expected Tuesday.
Looking to the primary market next week, $8.85 billion is expected to come to market, according to Bond Buyer estimates. In the negotiated market, $6.61 billion is expected, up from this week’s revised $3.56 billion. On the competitive calendar, $2.23 billion is expected, up from this week’s revised $1.88 billion.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board over the past week showed weakening.
A dealer sold to a customer Lamar, Texas, Consolidated Independent School District 5s of 2045 at 3.56%, six basis points higher than where they traded earlier in the week.
Bonds from an interdealer trade of Oregon 5s of 2027 yielded 2.53%, five basis points higher than where they traded the week prior.
A dealer bought from a customer Massachusetts Water Resources Authority 5s of 2024 at 2.37%, five basis points higher than where they traded at the beginning of the week.
A dealer sold to a customer New York Liberty Development Corp. 5s of 2041 at 3.90%, two basis points higher than where they traded the week prior.
Over the past week, ratios have fallen as munis outperformed Treasuries and became more expensive. The 10-year ratio Thursday closed down at 93.6% from 94.4% the week prior. The 30-year ratio ended at 103.8%, down from 104.8% the week before.
The five-year ratio rose to 77.8% on Thursday from 75.6% the week prior as munis on the short end underperformed Treasuries.
The slope of the yield curve also fell throughout the week. The 10- to 30-year slope fell to 137 basis points on Thursday from 138 basis points the week prior.
