NEW YORK – The tax-exempt market rallied Wednesday morning as confidence in Italy faded and investors jumped into safe-haven assets.
“There is very good activity,” said a trader in Atlanta. “As usual, when Treasuries are up, blocks move the fastest. High-grade blocks are moving.” The trader added that deals from yesterday are “cleaning up” and there is good activity all around.
In Wednesday morning trading, most tax-exempt yields were falling, according to the Municipal Market Data scale. The four-year muni yield fell up to two basis points, while the five-year fell up to four basis points. Yields on credits maturing between 2017 and 2019 dropped five to seven basis points while the nine-year yield saw the biggest cut, dropping up to eight basis points. The 10-year fell between five and seven basis points while maturities beyond fell between two and six basis points.
On Tuesday, two-year munis closed at 0.42% for its sixth consecutive trading session. The 10-year muni yield finished at 2.29% and the 30-year muni yield closed at 3.73%.
The Treasury market was beginning to rally heavily in Wednesday morning trading, with yields down up to 12 basis points on the long-end. The two-year yield was trading down one basis point from Tuesday’s close at 0.24% and the 10-year yield was down 10 basis points to 1.98% - the first time in a week it fell below 2%. The 30-year yield saw the biggest rally, falling 12 basis points to 3.02%.
“The pun around here is we are waiting for the other shoe to drop – and it is Italy,” a trader in Los Angeles said Tuesday afternoon. “It’s a much more serious threat than Greece was in terms of reality. So our hope is with Italy’s prime minister gone, we are one more step closer toward a resolution. I think that’s maybe the calm before the storm.”
And indeed, it appears the calm before the storm is over as fears over Italy are now stealing headlines. “The burst of optimism yesterday afternoon on news that Italian Prime Minister Berlusconi will resign after the new budget law is passed was short-lived,” Jennifer Lee, senior economist at BMO Capital Markets, wrote in her research note. “Very short-lived.”
In the primary market Wednesday, Citi is expected to price $600 million New York City Transitional Finance Authority future tax secured bonds for institutional investors after two days of retail pricing.
Bank of America Merrill Lynch is expected to price $333.7 million Massachusetts Water Resources Authority general revenue refunding bonds for institutional investors after completing a retail pricing Tuesday.
In the competitive market, North Carolina is expected to come to market with $400 million capital improvement limited obligation bonds. The credits are rated Aa1 by Moody’s, and AA-plus by Standard & Poor’s and Fitch.
The city and county of San Francisco is on the calendar to auction $335.7 million general obligation refunding bonds, rated Aa2 by Moody’s, AA by Standard & Poor’s, and AA-minus by Fitch.
The New York City Transitional Finance Authority is expected to issue future tax secured bonds in two pricings – $200 million followed by $100 million. The bonds are rated Aa1 by Moody’s and AAA by Standard & Poor’s and Fitch.
