NEW YORK – Traders showed frustration over the high demand for municipal bonds Thursday which is forcing prices higher and not allowing them to purchase the block sizes they requested. In many cases, traders said they are now staying out of the market until demand cools.
“When bonds aren’t yielding much, there are not many reasons to buy,” a New Mexico trader said. “We’d rather leave money in cash and wait for a better day.”
He added that rates haven’t changed much for the week and the supply-demand story is the same. “Volume of new issuance remains low and demand remains high so prices are high. There are not deals this week we’re expecting to buy and it’s the same as it has been for months. We are not participating because it’s too expensive.”
The trader also said it’s hard to find bonds in large blocks. “It’s hard to find something worth buying. And if you do, it’s a tiny amount. Buying blocks under five million doesn’t make much of a difference because it’s so small. So we’ve had a good year to date, but it will be hard to sustain.”
A New York trader noted a divergence between the primary and secondary markets. “Primary deals are coming at attractive spreads and the technical side of the market is still positive in terms of cash and muni mutual fund inflows,” he said. “Even though the calendar was about $8 billion, $3 billion of that was California, so it was still relatively manageable.”
But the secondary market told a different story. “You are seeing cheaper trades today,” the trader added. “The bid side seems to be weaker. The month-end was yesterday which probably caused some people to trim balance and square off positions ahead of month-end.”
All in all, “there seems to be less investor interest in the secondary because of the good deals in the primary.”
Munis weakened Thursday, according to the Municipal Market Data scale. Yields inside three years were steady while yields outside four yields jumped between one and seven basis points across the curve.
On Thursday, the two-year yield ended steady at 0.26%, its record low as recorded by MMD on Feb. 16. The 10-year yield increased five basis points to 1.90% while the 30-year yield jumped four basis points to 3.27%.
The Treasury curve steepened as yields on the long end rose on positive economic news. The benchmark 10-year yield jumped five basis points to 2.03% while the 30-year yield spiked up six basis points to 3.15%. The two-year yield fell one basis point to 0.30%.
In bankruptcy news, Stockton, Calif. skipped its $2 million bond payment earlier this week and began negotiations to try to avoid Chapter 9 bankruptcy. Traders said reaction in the secondary market was muted.
“Stockton is definitely the topic du jour,” the New York trader said. “I haven’t seen a lot of trades in the name but I think people are putting out small bids-wanted to get some price discovery. It’s a process and I don’t know that the first wave of selling has started yet.”
In the primary market, JPMorgan priced for institutions $2 billion of California various purpose general obligation refunding bonds, following a two-day retail order period. The credit is rated A1 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch Ratings. Pricing information was not yet available.
Retail investors placed $765 million of orders in the first day of retail, or 38.4% of the total offering. By the end of the second day of retail, $930.7 million orders had been placed, or 47% of the total offering.
“We were hoping for strong demand, and we weren’t disappointed,” said State Treasurer Bill Lockyer. “This is an excellent retail result. Now it’s on to wrapping up the deal and putting the savings into taxpayers’ pockets.”
JPMorgan also priced $130.1 million of State of New York Mortgage Agency homeowner mortgage revenue bonds in four series, rated Aa1 by Moody’s.
Yields on the first series, $50.1 million of bonds not subject to the alternative minimum tax, yielded 0.30% and 0.40% priced at par in a split 2013 maturity to 4.125% priced at par in 2040. The bonds are callable at par in 2021.
Yields on the second series, $43.1 million of bonds not subject to the alternative minimum tax, ranged from 0.20% priced at par in 2012 to 2.60% priced at par in 2021.
Yields on the third series, $24.9 million of bonds subject to the alternative minimum tax, ranged from 2.40% and 2.50% priced at par in a split 2018 maturity to 3.90% priced at par in 2027. The bonds are callable at par in 2021.
Bonds in the fourth series, $12 million of federally taxable bonds, yielded 3.40% priced at par in 2022. The credit is callable at par in 2022.
In the competitive calendar, Louisiana auctioned $443.8 million of GOs in two auctions – a $400 million deal and $43.8 million. The credits are rated Aa2 by Moody’s and AA by Fitch.
JPMorgan won the bid for $400 million. Yields ranged from 0.25% with a 4% coupon in 2013 to 3.19% with a 4% coupon in 2031. Credits maturing in 2012 were not formally reoffered. The bonds are callable at par in 2022.
Morgan Stanley won the bid for $43.8 million. The bonds mature in 2013 with a 5% coupon, 2014 with a 5% coupon, and in 2015 with a 4% coupon. Prices were not formally reoffered.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening.
Bonds from an interdealer trade of California 6.65s of 2022 yielded 4.08%, seven basis points higher than where they traded Wednesday.
A dealer sold to a customer Connecticut Health and Educational Facilities Authority 5s of 2041 at 4.40%, five basis points higher than where they traded Wednesday.
A dealer bought from a customer New York City Municipal Water Finance Authority 5s of 2045 at 3.84%, four basis points higher than where they traded Wednesday.
A dealer sold to a customer Illinois 5.1s of 2033 at 5.48%, two basis points higher than where they traded Wednesday.
For the entire month of February, ratios have fallen as munis outperformed Treasuries and became more expensive. The five-year ratio ended at 77.3% on Wednesday, down from 100% at the beginning of the month. The 30-year ratio ended at 104.5%, down from 106.8% at the beginning of February. The 10-year muni-to-Treasury ratio was the anomaly, rising slightly to 93.4%% from 93.3%.
The slope of the yield curve also fell throughout the month. The 10- to 30-year slope fell to 138 basis points from 146 basis points at the beginning of the month.
Investors have also moved out on the credit scale throughout February, especially in the 10-year range. But, investors pulled back from lower-rated credits on the long end. The 10-year triple-A muni to single-A muni spreads fell to 89 basis points at the end of the month from 91 basis points at the beginning of the month. Spreads fell down to 88 basis points mid-month before rising back up.
The 30-year triple-A to single-A spreads rose to 82 basis points from 79 basis, showing buyers are less willing to take credit risk longer out on the yield curve.
The two-year and five-year triple-A to single-A credit spreads were steady at 44 basis points and 72 basis points, respectively.