Market Post: Muni Yields Rise With Treasuries And Spike In Supply

NEW YORK – The tax-exempt market was much weaker Wednesday, the third consecutive down trading session, as muni yields followed Treasury yields higher and a flood of new supply forced concessions on new deals.

“I’m hearing deals need a good amount of concessions to entice buyers,” a New York trader said. “But even in the secondary munis are weaker, especially on 10s and 30s. It’s partially due to weaker Treasuries and we definitely need concessions for munis to find a home.”

He added that the weaker market is partly driven by heightened supply this week, but there was a fair amount of June reinvestment money that should have offset an increase in supply, so the market is mostly driven by weaker Treasuries. “I just think on an absolute basis munis yields are tight, so when new deals price, it’s mostly traditional buyers that are forcing some concessions.”

Munis continued to weaken Wednesday, according to the Municipal Market Data scale. Yields on the three- to five-year rose as much as two basis points. Outside six years, yields jumped between two and seven basis points.

On Tuesday, the 10-year yield jumped two basis points to 1.78%, to 11 basis points above its record low of 1.67% set Jan 18. The 30-year yield spiked four basis points to 3.09%, closing five basis points off the record low of 3.04% set Friday. The two-year yield was steady at 0.32% for the third consecutive trading session.

Treasuries were much weaker for the third session as investors traded in safe haven bonds for riskier assets. The benchmark 10-year and the 30-year yields each jumped nine basis points to 1.66% and 2.72%. The two-year yield rose two basis points to 0.27%.

In the negotiated market, Goldman, Sachs & Co. priced for institutions $800 million of New York City Transitional Finance Authority future tax-secured and tax-exempt subordinate bonds in two series, following a two-day retail order period. The bonds are rated Aa1 by Moody’s Investors Service and AAA by Standard & Poor’s and Fitch Ratings.

Yields ranged from 0.56% with 2%, 4%, and 5% coupons in a split 2015 maturity to 3.56% with a 5% coupon in 2039. Credits maturing in 2014 were offered via sealed bid. The bonds are callable at par in 2022 except for credits maturing between 2025 and 2028 which are callable at par in 2018.

Yields were increased up to nine basis points from the second day of retail pricing Tuesday and increased as much as 15 basis points on the long end from the first day of retail pricing Monday.

Bank of America Merrill Lynch priced $259.3 million of New Jersey Higher Education Student Assistance Authority student loan revenue bonds, subject to the alternative minimum tax, in two series.

Yields on the first series, $248.3 million of senior student loan revenue bonds rated Aa2 by Moody’s and AA by Standard & Poor’s, ranged from 1.10% with a 3% coupon in 2013 to 4.70% with a 4.625% coupon in 2030. The bonds are callable at par in 2022.

Bonds in the second series, $11 million of subordinate student loan revenue bonds rated A2 by Moody’s and A by Standard & Poor’s, were priced at par to yield 5.75% in 2039. The credits are callable at par in 2022.

In the competitive market, Citi won the bid for $226.3 million of Seattle, Wash., revenue bonds, rated Aa1 by Moody’s and AA-plus by Standard & Poor’s. Prices were not available by press time.

New York City Transitional Finance Authority auctioned $200 million of future tax secured taxable subordinate bonds in two pricings – each $100 million – rated Aa1 by Moody’s and AAA by Standard & Poor’s.

JPMorgan won the bid for the first $100 million. Prices were not yet available.

Details on the second pricing were not available by press time.

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