NEW YORK – Yields in the municipal market were dramatically firmer Wednesday amid light to moderate activity in the secondary market.
“We were firmer through the list,” a trader in New York said. “There was no run-up among high-grades against the others; they seem to move along with it.”
Munis were playing a game of catch-up following a two-day rally among Treasuries, he added, noting that Treasuries gave up some of the gains in the final hours of the session.
A trader in New Jersey said despite the low interest rates offered, new issues were finding plenty of buyers as traders scrambled for new paper.
In the new-issue market today, Morgan Stanley priced $462.8 million of state transportation refunding revenue bonds for the New Mexico Finance Authority.
The tax-exempt bonds, rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s, ranged from 0.50% in 2012 to 3.05% in 2024.
High demand pushed the yields down from an earlier preliminary pricing when they ranged from 0.60% to 3.10%.
The New York trader said the 10 basis point drop on the short-end reflects tremendous demand, as investors would rather pick up a little bit of yield rather than stuff cash under the mattress.
“There’s not enough paper at the moment,” the New Jersey trader added. “We’ll see whether the new-issue side of the business can correct that, but anything I see coming in is, for the most part, getting gobbled up.”
Goldman, Sachs & Co. priced $617.39 million of highway improvement Build America Bonds for the Texas Transportation Commission.
A source at Goldman said pricing would be released Thursday. A recent pricing wire said the 2019 bonds would offer a spread of 65 to 70 basis points over Treasuries, while 2025 bonds would offer a spread of 100 to 105 basis points.
The average life of the offering will be 13.15 years, compared with an average life span for BABs of almost 30 years.
A trader indicated that index funds, which have had few opportunities to purchase BABs at the intermediate range, could mop up the bonds, which are rated triple-A by all three major rating agencies.
“They are putting away all these BAB issues like there is no tomorrow,” said another trader in San Diego, noting that his firm was unable to coordinate with larger banks to distribute BABs simply because it’s so easy to sell them. “You’d have to see these issues come out in the billions before they start inviting people in.”
The Texas transportation deal is part of a larger issue exceeding $1 billion. JPMorgan is leading the tax-exempt portion of the deal and priced it for retail Wednesday. The offer ranged from 2% in 2011 to 5% in 2017.
The Municipal Market Data triple-A scale yielded 2.33% in 10 years on Wednesday, or six basis points lower than Tuesday’s close, while the 20-year scale yielded 3.29%, or four basis points lower than Tuesday levels. The scale for 30 year debt shed four basis points to 3.70%.
The strengthening builds on smaller gains Tuesday. The two-day rally marks a reversal from the trend over the past three weeks, in which muni yields had been rising after a series of record lows in late August.
Yields on the 10-year and 30-year triple-A scale bottomed out at 2.17% and 3.67%, respectively, on Aug. 25. The 20-year low of 3.28% was set Aug. 31.
Treasuries continued to rally in the intermediate and long end of the curve after broad gains yesterday.
The benchmark 10-year note finished Wednesday at 2.56%, two basis points lower than Tuesday’s close at 2.58%. That follows a 13 basis point strengthening on Tuesday and puts it closer to the calendar year low of 2.47% which was seen at the start of the month.
The 30-year bond closed the session at 3.75%, or four basis points lower than Tuesday’s close at 3.79%. Its 52-week low of 3.51% was seen on Aug. 26.
Pressure on the short-end was less pronounced. The two-year note yielded 0.44% late Wednesday, a basis point higher than Tuesday’s close. On Tuesday afternoon it yielded as little as 0.416% — a record low.
Appetite for Treasuries began strengthening Tuesday afternoon after the Federal Reserve indicated in its monetary policy statement that the economic recovery would be “modest” while inflation would likely remain “subdued.” The central bank indicated further quantitative easing could be possible if conditions warrant – a step that could further reduce interest rates, thereby making Treasuries more attractive.
“The story here is the Fed has become progressively more concerned about deflation risks over the past four months, and if you take that to its natural conclusion it speaks to a potential asset purchase program because of price fears in early 2011,” said a fixed income strategist in Philadelphia.
Other safe haven assets also saw a boost. Gold prices rose for a fifth straight day Wednesday to near $1,300 per ounce, a nominal record high according to Thomson Reuters.
Elsewhere in the muni market, Barclays Capital priced a $164.6 million issue for the University of Washington. The deal included $19.6 million of tax-exempt bonds ranging from 0.55% in 2011 to 4.13% in 2031, and $144.9 million of taxable BABs, which were not priced by press time.
More than four-fifths of the BABs portion was issued with a 30-year maturity. Both portions were rated triple-A by Moody’s and AA-plus by Standard & Poor’s.
Also, Siebert, Brandford, Shank & Co. priced $355.8 million of subordinate-lien revenue bonds for the San Diego County Regional Airport Authority.
The bonds, which are not subject to the alternative minimum tax, were rated A2 by Moody’s and A by Standard & Poor’s and Fitch Ratings. Series A offered yields from 1.48% in 2014 to 4.57% in 2040. Series B offered yields from 0.70% in 2011 to 4.57% in 2040.
Citi also priced $212.4 million of qualified school construction bonds for the Tennessee State School Board Authority, which is rated Aa2 by Moody’s and AA by Standard & Poor’s and Fitch. The taxable bonds mature in 2027 and though full pricing was not available, a preliminary pricing wire said they would offer 110 basis points over the 30-year Treasury.
In new economic data, the Federal Housing Finance Agency reported that prices of single-family homes fell 0.5% in July following a revised 1.2% decline in June.
