NEW YORK – The tax-exempt market was stronger Thursday, following Treasuries, as appetite for safe haven assets returned to the market place. New issues were received well after the large back up in yields earlier this week.
“Overall, sentiment for risky assets today has turned a little sour, due largely to disappointing economic data out of Europe,” said Otis Casey, director of credit research at Markit. “We saw the 10-year yields for Italy and Spain bleed a little higher which prompted some concerns. That helped buy the bid for Treasuries and to a lesser extent, munis.”
Despite the increased appetite for safety, the muni and Treasury rally today is “not a full fledged flight to quality move,” he said.
Munis continued to strengthen early Thursday afternoon, according to the Municipal Market Data scale. Yields inside five years were steady while the six-year yield rose one basis points and the seven-year yield jumped up three basis points. The eight- to 16-year yields jumped between two and six basis points. Outside 17 years, yields rose between one and three basis points.
On Wednesday, the two-year yield finished steady at 0.36%. The 10-year yield and the 30-year yield each fell two basis points to 2.31% and 3.45%, respectively.
Treasuries were stronger for the second day. The two-year yield fell one basis point to 0.37% while the 30-year yield dropped two basis points to 3.36%. The benchmark 10-year yield fell three basis points to 2.27%.
In the primary market, Goldman, Sachs & Co. priced for institutions $939.8 million of California State Public Works Board lease revenue bonds, rated A2 by Moody’s Investors Service and BBB-plus by Standard & Poor’s and Fitch Ratings. Pricing details were not yet available.
The institutional pricing follow a retail order period Wednesday. Retail investors ordered about $238.8 million of bonds, or about 25.4%, according to a spokesman for the California state treasurer.
Yields ranged from 1.11% with 2%, 3%, and 4% coupons in a split 2014 maturity to 5% priced at par in 2037. Portions of credits maturing between 2014 and 2022, and credits maturing between 2023 and 2026, 2028 and 2031, and between 2033 and 2036 were not offered for retail. The bonds are callable at par in 2022.
Barclays Capital priced $300 million of George Washington University taxable bonds, rated A1 by Moody’s and A-plus by Standard & Poor’s. Prices were not yet available.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed strengthening over the past few days and months.
A customer bought from a dealer Puerto Rico 4.25s of 2027 at 4.25%, 25 basis points lower than where they traded in mid-March.
Another customer bought from a dealer Akron, Ohio, 6.463s of 2033 at 3.77%, 23 basis points lower than where they traded in February.
A customer bought from a dealer Illinois 3.321s of 2013 at 0.80%, 10 basis points lower than where they traded Tuesday.
A customer sold to a dealer Triborough Bridge and Tunnel Authority 5s of 2021 at 2.41%, nine basis points lower than where they traded Wednesday.
After the large sell-off last week, some municipal analysts expect yields to rise at a much slower pace. “We believe that municipal bond rates could rise further but, given the much overbought condition in the Treasury market, the rise in tax-free bond rates should be much more muted than Treasuries,” wrote John Mousseau, managing director and portfolio manager at Cumberland Advisors.
He added that muni-to-Treasury ratios have come down on the long end since last October’s 150% ratio. “Using more normal ratios – such as the 85% to 95% present before the financial crisis – one would conclude that municipal bonds still offer large amounts of relative value, so yields should rise more slowly.”
In terms of the credit curve, Mousseau wrote he is moving towards the shorter-end of the curve. “We continue to ratchet down durations in accounts from the levels of last year. As supply picks up there should be opportunities available in the new-issue market that have not been present since early fall of last year.”
