NEW YORK – The next few days are going to be painfully slow in the tax-exempt market as traders start heading off to vacation Wednesday. There were spurts of activity Wednesday morning, but by afternoon, munis slowed to a crawl.
“Bottom line, it’s just shutting down,” said a trader in Chicago. “It is the slowest year in five or six years and part of it is what are customers really going to do? A lot of the time you get tons of losses or gains,” he said, referring to previous years.
“But there is no yield out there,” he said. “So are you going to sell something you bought a year ago and get four or five points? It’s creating an extremely quiet environment.”
He added the market “seems like a stalemate.”
This trader added “most shops and trading desks are holding positions because they think they'll offer them up in the first week of the year. When everyone leans in the same direction it’s maybe better to go the other way and no one will care at these absolute rates.”
Some traders said that Wednesday morning started out fairly busy, but activity quickly slowed in the afternoon.
“We are seeing a little action,” a New York trader said in the morning. “We were buying out of the chute but by 10AM, traders were already talking about lunch plans. So this could be over shortly.”
And indeed, by the afternoon, traders were looking to break early. “With the holiday season on the mind, it is tough to get customers to focus,” he said. “The market does feel firm to unchanged with January money looming.”
Indeed, the market is slowing. “Holiday apathy has already surfaced and it’s only Wednesday,” said MMD’s Randy Smolik. “Trades were getting fewer. It still takes a little concession to move some paper but it does feel like a fair amount of players were inclined to sit with position into the New Year.”
Munis were flat to weaker, according to the Municipal Market Data scale. Yields inside the five-year were unchanged. Yields between the six-year and 24-year rose one basis point while yields outside the 25-year increased two basis points.
On Wednesday, the two-year yield closed flat at 0.36% for its eleventh consecutive trading session. The 10-year muni yield increased one basis point 1.93%, one basis point higher than the record low as recorded by MMD, which was set Monday. The 30-year muni yield increased two basis points to 3.64%.
Treasuries continued the sell-off that began Tuesday, erasing all gains made over the previous week. The two-year yield rose two basis points to 0.28%. The benchmark 10-year yield increased four basis points to 1.97%. The 30-year yield jumped seven basis points to 3.00%. This week, the 10-year yield has jumped 16 basis points while the 30-year yield has spiked 21 basis points.
In the primary market Wednesday, Rice Financial priced $90 million of Jackson, Miss., Redevelopment Authority urban renewal revenue bonds. Details were not available by press time.
In the competitive market, Morgan Stanley, Bank of America Merrill Lynch, and Citi won the bid for $100 million of Suffolk County, N.Y., tax anticipation notes, rated M1G-1 by Moody’s Investors Service and F1-plus by Fitch Ratings.
Morgan Stanley won the bid for $45 million. The notes yielded 1.14% with a 2% coupon in 2012.
Bank of America Merrill Lynch won the bid for $30 million. The notes yielded 1.09% with a 2% coupon in 2012.
Citi priced $25 million of notes, yielding 1.04% with a 2% coupon in 2012.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board were mixed with munis firming and weakening by mid-morning.
A dealer sold to a customer California 5.5s of 2040 at 4.46%, 14 basis points higher than where they traded Monday. Another dealer sold to a customer Florida State Board of Education 5s of 2031 at 3.63%, two basis points higher than where they traded Monday.
A dealer bought from a customer New York Liberty Development Corp. 5s of 2041 at 4.29%, two basis points higher than where they traded Monday.
But other trades showed firming. Bonds from an interdealer trade of Puerto Rico Sales Tax Financing Corp. 5s of 2046 yielded 4.69%, 10 basis points lower than where they traded Monday.
A dealer bought from a customer New York City Municipal Water Finance Authority 5s of 2034 at 3.91%, five basis points lower than where they traded Tuesday.
Bonds from an interdealer trade of Detroit Water Supply System 5s of 2036 yielded 5.11%, one basis point lower than where they traded Tuesday.
Munis have been able to hold mostly steady despite a big selloff in Treasuries, forcing s to close lower. On Tuesday, the five-year muni-to-Treasury closed at 105.8% from 113.8% on Monday. The 10-year ratio closed down at 100% on Tuesday from 106.7% on Monday. The 30-year muni-to-Treasury ratio closed down to 123.5% from 129.4%.
When looking at which section of the yield curve is cheap or rich, Loop Capital Markets said the value zone in December has moved out on the curve from November. Chris Mier, municipal strategist, notes the cheapest credits are between the 12-year and the 20-year maturities. But, “the nine-year spot stands out as an opportunity ripe for picking,” he noted.
Mier also examines the impact of ratings by Moody’s and Standard & Poor’s. According to Mier’s preliminary results, the market prices in changes in a rating by Moody’s 5.87 basis points more than a change in the Standard & Poor’s rating. Similarly, bonds that aren’t rated by Moody’s are priced to a one level worse rating, where as a bond missing a Standard & Poor’s rating is priced only about half of a level worse rating.
