New-issue municipal deals were well-received Tuesday even with market under pressure from sell-offs and the looming threat of a change in the Federal Reserve's economic stimulus policy.
"Munis have had a good rally but they're a little mixed today," one New York-based trader said. "With the Fed meeting tomorrow people are on their heels a little bit."
Market participants expect the Federal Reserve to begin a tapering program soon, in which it will slow its policy of monthly bond buybacks. With its intention to taper announced in the spring, the Fed has yet to confirm when such a strategy would begin.
A Federal Open Market Committee announcement Wednesday has some investors on edge as a result, though many say the damage to the municipal market has largely been done.
"We had a pretty dramatic reaction back from May through July and the Fed has already had all this time to talk everybody down from the ledge," Tom Dalpiaz, a managing director at Granite Springs Asset Management, said in an interview. "If the Fed begins to taper I would expect a reaction, maybe with 10-year Treasuries getting pushed up, but I wouldn't expect the reaction to be where it was earlier in the year."
The benchmark 10-year Treasury yield slid four basis points from Monday to 2.84%, while the 30-year yield fell three basis points to 3.87%.
The two-year yield slipped a basis point to 0.32%.
With a much smaller slate of new-issue bonds compared with the $10.63 billion of sales last week, deals priced Tuesday were met with solid demand, traders said.
Estimates for the coming week's volume show a lighter offering of new issues, with potential muni bond volume on the week expected to be $2.59 billion, according to data from Ipreo, The Bond Buyer and Thomson Reuters.
Several issues on the negotiated calendar this week top $100 million, including $289 million of Pennsylvania Economic Development Financing Authority parking revenue bonds, which Guggenheim Securities priced for institutions Tuesday morning.
The first series, $120 million of parking system revenue bonds, featured yields from 3.56% with a 5% coupon maturing in 2022 to 5.45% with a 5.25% coupon in 2044.
The bonds, insured by Assured Guaranty Municipal Corp., have ratings of A2 by Moody's Investors Service, AA-minus by Standard & Poor's and BBB-minus by Fitch Ratings.
The second series, $99 million of junior- lien parking revenue bonds, had yields from 1.35% with a 5% coupon in 2018 to 5.25% with a 6% coupon in 2053. Those bonds were rated A1 by Moody's and AA by S&P and Fitch.
The third series of $70 million junior-lien parking revenue bonds were insured by AGM and had yields ranging from 0.70% with a 5% coupon maturing in 2016 to 4.61% with a 5.5% coupon in 2033. All of the series are callable at par in 2024.
Southwest Securities also brought $99 million of La Quinta Redevelopment Agency refunding bonds to market in a deal that went very well, according to traders familiar with the deal.
"The market is not perfect but it's hanging in there with some new offers that are good," a New York-based trader said.
Yields on the Municipal Market Data triple-A scale Monday were largely unchanged throughout the curve, with yields on bonds with maturities in 2021 falling as much as one basis point.
Yields on the Municipal Market Advisors benchmark triple-A scale improved in some sections of the curve beyond six years.
The 10-year yield fell one basis point, as well as bonds with maturities in 2020 and 2022.
Trades in the secondary market were mostly weaker on Monday, according to data from Markit.
Ohio Tobacco Settlement Financing Authority bonds with a 5.125% coupon maturing in 2024 saw yields rise five basis points to 7.55% from 7.50%, and Philadelphia Hospitals and Higher Education Facilities Authority revenue bonds with a 6.25% coupon maturing in 2023 gained three basis points to 6.32%.
California Statewide Community Development Authorization revenue bonds with a coupon of 5% maturing in 2042 fell two basis points to 5.13%, and California pollution revenue bonds with a coupon of 5.1% maturing in 2040 fell two basis points to 5.08%.
In the competitive market, Massachusetts auctioned $525 million of general obligation bonds on Tuesday, with Bank of America Merrill Lynch winning the bid.
Some investors have been selling unwanted bonds before getting a fresh start in the New Year, traders said.
Offers to sell may increase as the year comes to a close and investors try to get out of certain positions.
"There are a lot of customer lists with some bid-wanteds out," a trader on the West Coast said in an interview. "There might be a little year-end liquidation going on with people getting ready to close their books, and that may produce some pressure on the market."
As investors look at their portfolios before year-end, many use poorly-performing bonds to their advantage by selling them in order to balance out gains from stronger securities.
The move lowers the amount of taxes associated with gains and opens up room on the books to take on new positions.
"People are selling bonds to take a loss," Dalpiaz said. "It helps you manage tax liabilities and take advantage of losses you have in an existing portfolio. And this year, people have plenty of losses to get out of."