NEW YORK — The municipal market is witnessing the unwinding of the Fed’s Operation Twist as yields for tax-exempts and Treasuries are backing up in the day’s sell-off.
The weaker tone in the muni market has carried over from Monday and accelerated somewhat from the morning. Still, the sell-off is orderly, a trader in California said.
“We’re seeing that the sell-off in Treasuries and munis is definitely setting the tone today,” he said. “Overall, the longer end of the market is taking more of the pain in municipals.”
There’s also been a fair amount of institutional bid-wanteds out in the market, the trader said. BlackRock has put out some large lists for the bid, he added, as have Putnam and Eaton Vance.
“Most of the stuff that’s been put out for the bid is longer,” he said. “There’s definitely a weaker tone in the market. And I think people are looking to unwind some of the trades that they had put on in the past.”
Tax-exempt yields appear primed for another session of weakening. Thus far, they’re steady out to two years, according to the Municipal Market Data scale.
Yields in 2014 and 2015 are up one to three basis points. Yields beyond 2015 are three to five basis points higher.
The 10-year muni yield jumped five basis points on Monday to 2.02%. It had been at a record low of 1.97% for the two previous sessions.
The 30-year yield climbed three basis points on the day to 3.44%, up from its all-time low. The two-year yield remained at 0.32% for an eighth straight session.
Treasury yields crossed noon weaker across the curve. The rate increases follow incredible rallying at the intermediate and longer parts of the curve last week, and so are rising from otherwise extreme lows.
The benchmark 10-year Treasury yield has jumped nine basis points to 1.99%. The two-year yield has ticked up one basis point to 0.25%.
The 30-year yield, which plunged as much as 53 basis points last week, has risen eight basis points to 3.08%. It also climbed 10 basis points during Monday’s session.
The market expects a small decrease in new supply for this week, after a considerable increase in issuance last week. This week, the market expects an estimated $6.83 billion in new supply. Last week saw a revised $7.86 billion of volume.
Many large deals are slated to come to market Tuesday. Minnesota led the way in the competitive market with three series of general obligation offerings that total $769 million.
In the largest of those, Bank of America won $445 million of Minnesota GO state various purpose bonds. The bonds were rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.
Yields ranged from 0.52% with a 5.00% coupon in 2014 to 3.85% with a 4.00% coupon in 2031. Debt maturing in 2012, 2013, 2017, 2018, 2021, 2022, 2024, 2026, and 2027 were sold but not available.
MMD analyst Randy Smolik suggested in a recent research post that prices on the new issues portend a weaker tax-exempt market overall.
“Re-offerings on the largest Minnesota GO loans differed by as much as eight basis points,” he wrote. “The institutional pricing on $729 million New York City GOs cheapened five to 13 basis points from yesterday’s retail offering.”
The equities markets continue to rally. All major indexes are up from Monday’s close by at least 2.27%. The Dow Jones Industrial Average is up so far 270 points.
