The tax-exempt market got off to a strong start Monday as deals began pricing in the primary market.
After Hurricane Sandy shut down most of the market last week, many deals were expected to price early this week, and all eyes were focused on the primary market.
Still, traders noted that outside of new issues, the rest of the municipal bond market felt like a typical slow Monday.
"It's very slow," a trader in Texas said. "We are waiting on new issues. There is not much out for the bid customer or otherwise. Retail buying is very slow. It's inquiry driven and mostly new money."
Other traders noted that trading activity was slow as market participants kept their eye on the primary market.
"It's a little slow," a New York trader said. "Lots of people are watching new deals."
In the primary market this week, $7.06 billion is expected to be priced, up from last week's revised $1.65 billion.
On the negotiated calendar, $5.75 billion should be issued, up from last week's revised $1.16 billion. In competitive sales, $1.31 billion is expected to be auctioned, up from last week's revised $494 million.
JPMorgan priced and repriced $235.4 million of California Health Facilities Financing Authority revenue bonds, rated A1 by Moody's Investors Service, A-plus by Standard & Poor's, and AA-minus by Fitch Ratings.
Yields ranged from 0.50% with a 5% coupon in 2014 to 4% coupon priced at par and 3.58% with a 5% coupon in a split 2039 maturity. The bonds are callable at par in 2022. Yields were lowered as much as 10 basis points in repricing.
Morgan Stanley held preliminary pricing for $175.2 million of Connecticut general obligation bonds, rated Aa3 by Moody's, and AA by Standard & Poor's and Fitch.
Yields ranged from 2.03% with a 3% coupon in 2022 to 3.09% with a 4% coupon and 2.79% with a 5% coupon in a split 2032 maturity.
Bonds maturing in 2013 were offered via sealed bid. The bonds are callable at par in 2022.
Bank of America Merrill Lynch won the bid for $250 million of Maryland's Washington Suburban Sanitary District consolidated public improvement bonds, rated triple-A.
Yields ranged from 0.198% with a 2% coupon in 2013 to 3.04% with a 3% coupon in 2032. The bonds are callable at par in 2022.
On Monday, the Municipal Market Data scale was steady to firmer. Yields inside six years were steady while seven- to nine-year yields fell two basis points. Outside 10 years, yields dropped one basis point.
Treasuries strengthened Monday. The benchmark 10-year yield fell four basis points to 1.68% while the 30-year yield dropped five basis points to 2.86%. The two-year yield fell one basis point to 0.27%.
With muni yields hovering around record lows, credit spreads have compressed across the curve as investors move down the credit scale in search for yield. Not only have triple-A to single-A MMD yields compressed, but lower-rated states have seen yields compress relative to higher-rated states.
According to figures from data provider Markit, spreads on lower rated states – in particular California – have tightened this year both in absolute terms and also relative to higher rated issuers such as New York City, New Jersey, and Nevada.
As of October, single-A rated California traded 67 basis points above the MMD scale while double-A rated Nevada traded 65 basis points above MMD. More strikingly, spreads on California GOs have compressed 47 basis points in one year while Nevada has tightened only 5 basis points.
Relative to New Jersey, which is rated double-A-minus, California's spread has tightened 30 basis points. Compared to New York, California's spread has tightened 37 basis points.
"California has moved dramatically tighter in the last year, both in absolute terms and relative to other issuers like NYC and NJ," analysts at Markit said. "With the relative spread so narrow, we think that this might signal a peak in the market or at very least illustrate how much hunting for yield has occurred in the muni market."
Illinois, another single-A-rated state, has seen spreads compress 29 basis points relative to the MMD scale in a one-year period. As of October, Illinois yields were trading about 140 basis points off the MMD scale.
Illinois spreads have tightened 12 basis points over the past year relative to New Jersey and 19 basis points compared to New York.
On the other hand, Nevada – a double-A rated credit – has seen its spread widen when compared to similarly rated New Jersey. The spread between Nevada and New Jersey credits has widened 22 basis points.
"The face of the market is completely different than it was two years ago," the Markit analysts added. "It needs to be looked at again with sharp eye. From a pure credit perspective, look at what you own and make the right evaluation."
And with the Fed promising to keep rates low for at least another two years, and with the lack of supply in the muni market right now, it's imperative for traders to do their own research. "With both low interest rates and no supply, people need to get the best paper for the best money."