NEW YORK — The tax-exempt market ended the day lower, following Treasuries, as Wednesday's losses continued for a second day.
Traders took advantage of the large rally earlier in the week as a selling opportunity. But even as yields rose, traders said the market needed to weaken much more before they'd jump back in.
"It's definitely a little weaker," a Chicago trader said. "We're not up big and we're not down big. We're just trending lower."
He added that between the $25 billion in redemptions in each May and June, there is plenty of money to put to work. "There is a lot of support still. But a lot of our customers are saying 'I really need a new idea' and now we're back to more of the same."
Another trader said the market was focused on getting the last of this week's primary calendar before focusing on the secondary market. "Munis are weaker," a New York trader said. "There is a lot of concentration on new issues. Dealers are trying to sell those so there is less focus on the secondary."
Indeed, muni yields closed higher, according to the Municipal Market Data scale. Yields inside six years were steady but yields outside seven years jumped between one and three basis points.
On Thursday, the two-year yield closed steady at 0.33% for the fourth consecutive trading session. The 10-year yield jumped three basis points to 2.00% while the 30-year yield increased one basis point to 3.35%.
Treasuries were weaker on the long end. The benchmark 10-year yield and the 30-year yield each rose three basis points to 2.06% and 3.22%. The two-year was steady at 0.29%.
In the primary market, Morgan Stanley priced for institutions the largest deal of the week, $1.3 billion of California various purpose general obligation bonds, rated A1 by Moody's Investors Service and A-minus by Standard & Poor's and Fitch Ratings. After a two-day retail order period, individual investors bought $418.9 million, or 32.2%, of the total deal, according to a spokesman for the California state treasurer.
In institutional pricing, yields on the first series, $890 million of new money for infrastructure projects, ranged from 0.68% with a 3% coupon in 2014 to 4.47% with a 4.375% coupon and 4.39% with a 5% coupon in a split 2042 maturity. The bonds are callable at par in 2022. Yields were increased two to four basis points outside of 2017 maturities for retail pricing.
Yields on the second series, $410.2 million of refunding bonds, ranged from 0.68% with 3% and 4% coupons in a split 2014 maturity to 3.20% with a 5% coupon in 2024. The bonds are callable at par in 2022. Yields were increased one to five basis points from retail pricing.
In the competitive market, South Carolina auctioned $144.1 million of GO bonds in two pricings, following a $76.8 million pricing Wednesday. The credit is rated Aaa by Moody's and Fitch and AA-plus by Standard & Poor's.
Bank of America Merrill Lynch won the bid for $82.6 million of GOs priced in two series. Yields on the first series, $31.4 million of transportation infrastructure refunding bonds, ranged from 0.20% with a 4% coupon in 2013 to 2.71% with a 2.5% coupon in 2025. Credits maturing in 2015, 2016, 2018, and 2019 were sold but not available. The bonds are callable at par in 2022.
Bonds in the second series, $51.2 million of state capital improvement bonds, were sold but not available. Maturities ranged from 2013 to 2019.
Bank of America also won the second pricing of $61.5 million of South Carolina GOs. Bonds on the first series, $32.8 million of state school facilities refunding bonds, yielded 0.30% with a 3% coupon in 2013. Credits maturing between 2014 and 2018 were sold but not available.
Yields on the second series, $28.7 million of state economic development refunding bonds, ranged from 0.30% with a 3% coupon in 2013 to 3.12% with a 3% coupon in 2029. Credits maturing in 2016, 2019, 2020, and between 2024 and 2027 were sold but not available. The bonds are callable at par in 2022.
In the secondary market, munis traded much lower with yields rising one to five basis points across the curve, according to data compiled by Markit. Of a sample of 10 CUSIP numbers, nine were weaker.
Yields on Ohio 5s of 2023 jumped 3 basis points to 2.51% and Puerto Rico Commonwealth 5s of 2041 increased 3 basis points to 5.18%. Yields on Virginia Beach, VA, 5s of 2023 jumped four basis points to 2.26% and New Jersey Economic Development Authority 4.95s of 2047 rose one basis point to 4.97%.
The biggest movers included yields on Massachusetts Water Resources Authority 5.25s of 2027 which jumped five basis points to 3.05% and Dormitory Authority of the State of New York 5.25s of 2032 which also climbed five basis points to 0.58%.
Over the course of this week, muni-to-Treasury ratios increased as munis underperformed Treasuries and became comparatively cheaper. The five-year muni yield to Treasury yield rose to 98.9% from 96% at the end of last week. The 30-year ratio jumped to 105% from 103%. The 10-year ratio was virtually unchanged, falling to 97.5% from 97.7% last week.
And even though the five-year ratio is below 100%, some analysts think it provides the best value. "The 5-year range is currently the best place for 'value' in the muni bond market," according to MMD's Daniel Berger. "Muni investors should achieve outperformance in this range because when analyzing the past 12 months the 5-year ratio is 94.3%."
He added the value in the five-year range is even more apparent when looking at the average 88.9% ratio over the past three months.
