Wednesday’s market offered little save for a fourth day of steady yields.
A trader in New York compared the muni market to a pack of wild horses nibbling the grass, pausing to look around, and then nibbling some more.
“This is a market that responds to herd instinct, but nobody knows which direction to run,” he said. “People are starting to think about the three-day holiday, and seeing if they can stretch it out to four or five days.”
Five-year note yields rose two basis points and 30-year bond yields fell one basis point, but all others were unchanged, according to Municipal Market Data’s triple-A scale.
A trader in San Francisco described the market as illiquid, while MMD analysts referred to trading as “lethargic.”
The four steady sessions follow a brief sell-off last Thursday, which slightly dented a five-week rally. MMD’s two-year note held at 0.44% Wednesday, the 10-year note stayed at 2.65%, and the 30-year yield fell one basis point to 4.30%.
Treasuries were a bit volatile but offered little guidance. The benchmark 10-year yield finished at 3.13%, two basis points higher than Tuesday. The two-year yield rose three basis points to 0.535% and the 30-year yield rose two basis points to 4.27%.
Municipal analysts continue to see the past week more as a temporary pause in the rally rather than a reversal.
“Muni to Treasury ratios are on the low side of recent range, but we see continued room to run for munis given the dearth of new issues, and the strong reinvestment flows expected in June and July,” wrote Alan Schankel and Tom Kozlik, analysts at Janney Capital Markets.
“In June alone, about $50 billion of municipals will mature or be redeemed, dwarfing the $15 billion of average monthly new issuance through April,” they added.
The wealth management group at UBS released a monthly research note Wednesday arguing that muni prices should hold at current levels during the summer reinvestment period.
“We foresee demand outstripping supply for the remainder of the summer, lending technical support to the market through Labor Day,” the group headed by Thomas McLoughlin wrote. “In light of the market rally, we suggest investors take this opportunity to upgrade the credit quality of portfolios, diversify holdings geographically, and consolidate odd-lot positions.”
Diversifying by region can mean giving up some tax-advantage, but with issuance down more than 50% nationwide and 70% to 90% in certain states, UBS “strongly suggest[s] crossing state lines more often,” as lighter issuance could mean better performance.
“Investors should be prepared for technical factors to weaken after Labor Day,” UBS analysts wrote, citing the potential for a Treasury sell-off combined with some supply returning to the muni market.
“Offsetting factors that could keep municipal yields lower for longer include: a structural shift to a prolonged period of lower issuance and Treasury rates not rising significantly,” they added.
McLoughlin’s team noted that 2011 issuance is likely to come in below the $225 billion mark, the slimmest amount since 2000. Other forecasts tend to range from just under $200 billion to $240 billion.
With banks continually revising their estimates lower, it was only a matter of time before rating agencies gave their two cents.
Standard & Poor’s and Moody’s Investors Service released reports Wednesday citing a number of factors that will lead to less issuance this year and next.
“While we typically see debt levels increase during times of fiscal difficulty, we wouldn’t be surprised to see a weaker debt issuance trend in 2011 and 2012 given our view of the state of the market and the fiscal and political environment,” Standard & Poor’s wrote.
The Build America Bonds program, which provided a 35% interest payment subsidy on taxable bonds for state and local governments until its expiration on Dec. 31, 2010, played a huge role in the record volume of 2010 as issuers front-loaded bond sales into 2010 to capitalize on the program.
Issuers also anticipated additional investor appetite for munis following the expected termination of the Bush tax cuts at the end of 2010, Moody’s wrote.
Total debt issuance for state and local governments was $48.3 billion in the first quarter of 2011, compared with $133.4 billion in the last quarter of 2010. And fiscal 2011 first quarter issuance was down 46% compared with 2010 first quarter issuance of $103.1 billion.
“While most states continue to experience budgetary strain, they appear to be avoiding deficit financings or bond issuances for debt restructuring to balance budgets,” added Moody’s in its report. “Most states will likely turn to revenue increases, through taxes and fees, and spending cuts to resolve their budget gaps.”
But states will continue to use long-term debt to finance their capital needs, as they will have fewer options to fund projects through weak revenue growth and continued budget reductions.
Higher capital costs will mean lower overall issuance for states’ capital needs this year, Moody’s added. Some states have already reduced their capital budgets for fiscal 2012, compared with past years and previous issuance projections, the Standard & Poor’s report added.
Among a range of new deals Wednesday, Citi sold $278.2 million of school facility revenue bonds in two parts for the Eric County Industrial Development Agency in Buffalo, NY. Both series were rated Aa3 by Moody’s and AA-minus by Standard & Poor’s.
The first series for $165.5 million offered yields from 0.99% in 2013 to 4.83% in 2032. The second series for $112.6 million offered yields from 0.99% in 2013 to 4.14% in 2024.
RBC Capital Markets priced $136.5 million of transportation excise tax revenue bonds for the Regional Transportation Authority of Pima County, Ariz. Rated Aa3 by Moody’s Investors Service and AA by Standard & Poor’s, the bonds offer yields from 0.83% in 2012 to 4.17% in 2026.
In the competitive market, JPMorgan won $106.7 million of special revenue bonds for Jacksonville, Fla. The deal was rated Aa2 by Moody’s, AA-minus by Standard & Poor’s, and AA by Fitch. The bonds offered from 2013 to 2041, with yields from 1.11% to 5.13%
Elsewhere in the negotiated new issue market, RBC priced $69.3 million of revenue refunding bonds for the Trinity River Authority of Texas. The bonds boast a triple-A rating from Standard & Poor’s and a AA-plus rating from Fitch Ratings. Yields range from 0.37% in 2012 to 2.74% in 2020.
Bank of America Merrill Lynch priced a three-pronged, $62.7 million deal of general obligation bonds for Anchorage, Alaska.
A portion of general purpose bonds were rated AA by Standard & Poor’s and AA-plus by Fitch. Yields ranged from 0.56% in 2013 to 4.38% in 2031.
The other two parts, for schools, carried the same ratings but offered yields from 0.62% in 2013 to 2.99% in 2021.
