The tax-exempt market opened the first trading session of the fourth quarter on a steady to weaker tone as dealers lightened inventory as the government shutdown started and the debt ceiling limit loomed.
For the most part Tuesday, municipal bond yields were unaffected by the first day of the government shutdown, avoiding any substantial gains or losses.
Vanguard put out a large bid list in the morning and with little new issuance in the primary market, buying power emerged in the secondary. “That had some size and got some real interest generated, but if you don’t have something like that, there’s not a whole lot around,” a Los Angeles trader said.
There is some uncertainty in the fixed-income market with the first day of the government shutdown, and the debt ceiling and tapering of the Federal Reserve’s stimulus on the horizon. “With the shutdown you can quantify what the effects will be because this has happened before,” this trader said. “But with the debt ceiling fight, we are potentially moving into unchartered territory. It’s very difficult to see how this ends.”
Dealers are light due to little issuance, and that is leaving room for all opinions in the market, traders said. “Do we see a flight to quality paper or people running away? No one is heavy because there’s not a lot of supply. So you can put stuff out and get lighter or you can buy what’s being put out there. There is room for everyone’s opinion.”
Other traders said the market appeared unaffected. “The shutdown is really not a factor in the muni market,” a New York trader said. “There are a lot of bids-wanted out there, but people are seeing good turnover. It’s a slightly weaker tone but nothing of consequence.”
There are different degrees of severity between the government shutdown and the debt ceiling, said Wayne Schmidt, chief investment officer at Gradient Investments. “The government shutdown is more like playing with matches. The debt ceiling is like playing with fire.”
“In the near-term with a government shutdown, munis and Treasuries see it as a non-event. And week one is probably not a huge deal. But if it starts getting into week two or three, we get closer to that Oct. 17 date which is the bigger issue.” Oct. 17 is the estimated date when the Treasury department will no longer have the ability to borrow money to pay its bills.
“From a muni standpoint, states are more closely-linked to the U.S. government for different programs and funding and will be more affected than local communities,” he said. “The impact on municipalities is different depending on ties to the Federal government.”
In August 2011, Standard & Poor’s downgraded the U.S. from its coveted triple-A rating, and Treasury bonds subsequently rallied. Only two years later, market participants wonder what would happen to yields during a flight to safe haven assets as the debt ceiling debate approaches once again.
“The debt ceiling has been raised 14 times in 13 years so the 15th is a safe bet,” Schmidt said. “The U.S. won’t default on its debt and will still be perceived as the flight to quality trade. Yields are also much more attractive today than they were at the beginning of the year.”
In the primary market Tuesday, Siebert Brandford Shank & Co. priced for retail $463 million of California State Public Works Board lease revenue bonds, followed by institutional pricing Wednesday. The deal includes two series for correctional facilities projects rated A2 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch Ratings, as well as one series for various projects at the California State University rated Aa3 by Moody’s and A-minus by Standard & Poor’s and Fitch.
Yields on the first series of $135.8 million ranged from 0.51% with a 1% coupon in 2015 to 4.70% with a 4.625% coupon in 2033. Bonds maturing in 2014 were offered via sealed bid. Bonds maturing between 2029 and 2032 were not offered for retail. The bonds are callable at par in 2023.
Yields on the second series of $163.5 million ranged from 0.51% with a 5% coupon in 2015 to 4.15% with a 5% coupon in 2028. Bonds maturing in 2014 were offered via sealed bid and portions of bonds maturing between 2026 and 2033 were not offered for retail. The bonds are callable at par in 2023.
Yields on the third series of $163.7 million ranged from 0.80% with a 5% coupon in 2016 to 4.60% with a 4.5% coupon in 2033. Portions of bonds maturing between 2026 and 2038 were not offered for retail. The bonds are callable at par in 2023.
Raymond, James & Associates priced $120.8 million of Louisiana Energy and Power Authority power project revenue bonds, rated A-minus by Standard 7 Poor’s and Fitch and AA-minus with a wrap by Assured Guaranty Municipal Corp.
Yields ranged from 1.54% with a 3% coupon in 2017 to 5.10% with a 5% coupon in 2044. The bonds are callable at par in 2023.
In the secondary market, trades compiled by data provider Market showed strengthening. Yields on New Jersey Tobacco Settlement Financing Corp. 4.625s of 2016 fell four basis points to 6.00% and Columbus, Ohio, 5s of 2023 fell two basis points to 2.70%.
Yields on East Bay, Calif., Municipal Utility District 5s of 2021 and Minnesota General Fund 5s of 2029 fell one basis point each to 2.13% and 3.70%, respectively.
On Tuesday, yields on the triple-A Municipal Market Data scale ended as much as two basis points higher. The two-year yield rose one basis point to 0.37% and the 10-year yield increased two basis points to 2.56%. The 30-year was steady at 4.12%.
Yields on the Municipal Market Advisors scale also ended steady to one basis point higher. The 10-year and 30-year yields increased one basis point each to 2.71% and 4.27%, respectively. The two-year was steady at 0.54% for the ninth consecutive trading session.
Treasury yields were slightly higher. The benchmark 10-year yield increased three basis points to 2.65% and the 30-year yield rose two basis points to 3.72%. The two-year was steady at 0.34%.
