NEW YORK – Tax-exempt investors are showing no hesitation in leaping out the yield curve to lock in long-term rates. The move is flattening the triple-A curve as yields fall as much as 14 basis points to new 2011 lows.
“The action has finally kicked into the muni market,” said a trader in Los Angeles. “Yesterday we were crazy which is always wonderful, and today it seems like the market is never going to stop.”
She said the flight to quality is always your best bet in volatile sessions, and for munis that includes triple-A and double-A bonds.
“A lot of L.A. GOs that came from JPMorgan are finally getting put away,” she said, referring to a July 22 competitive deal that other traders have called mispriced.
The buying is driven by institutional buyers, whereas the retail market is going to have a hard time catching up with the new reality, she added.
“Yields are so low,” she said. “But whether they want to ignore or fight it, they can’t. This is all you get.”
It’s hard to say if low yields can be sustained but they probably will, she added. After all, the muni market faced record low yields in August 2010.
Munis maturing beyond 2031 are seeing yields drop 11 to 14 basis points, Municipal Market Data says. Munis maturing from 2018 to 2030 have yields falling 8 to 10 points, while two-year yields, previously unchanged, are now two basis points firmer. Munis maturing in 2014 to 2017 are five to seven basis points firmer.
The main driver is Treasuries, but munis are actually outperforming since the morning rally has died down a bit.
The 10-year Treasury yield fell just under 2.55% in mid-morning but more recently was at 2.58%. That would still market the lowest closing yield of the calendar year – the record was set Tuesday at 2.61%. In mid-April the 10-year Treasury was yielding at much as 3.59%, or 101 basis points more than on Wednesday.
The 30-year yield, after dropping an incredible 19 basis points Tuesday, is down another five basis points at 3.85%. It stands 91 basis points from its high for the year, at 4.76% on Feb. 10. Earlier on Wednesday it traded as low as 3.79%.
With investors flocking to intermediate and long bonds, the two-year Treasury yield is actually a basis point weaker at 0.33%.
“We’re just playing catch up,” added a muni trader in Dallas, referring to the much broader rally in Treasuries over the past month. “Now that you’re past the downgrade risk, we’re back to the low supply issue.”
The market is expected to only absorb $3.25 billion in new supply this week after issuers decided to play it safe and avoid borrowing during a volatile period.
Bad move, it turns out. Issuers lucky or smart enough to be in the market are getting one heck of a deal.
Major deals include the New York City Transitional Finance Authority selling $448.3 million of tax-secured subordinate bonds. The TFA deal is rated Aa1 by Moody’s Investors Service and AAA by Standard & Poor’s and Fitch Ratings.
Yields range from 0.43% on a 2% coupon in 2013 to 3.87% on a 5% coupon maturing in 2029. In Tuesday’s retail period, 2029 bonds with a 4% coupon were sold at par.
Triple-A rated Montgomery County, Md., is priced $320 million of GO bonds with yields ranging from 0.54% in 2014 to 4% in 2031.
The county also sold $212.1 million of GOs in the competitive market. Citi won the deal
Among high-yield offerings, San Buenaventura priced $350 million of revenue bonds for the Community Memorial Health System. Underwritten by Bank of America Merrill Lynch and rated Ba2 and BB by Moody’s Investors Service and Standard & Poor’s, the bonds offer yields from 5.11% in 2016 to 7.65% in 2041.
“That deal should get put away today, no problem,” said the trader in Los Angeles. “Merrill should have nothing on their books by the end of the day; if they do I’ll be shocked.”
