Market Post: Munis Stronger with Limited Supply, Slow in Outflows

The tax-exempt market opened slightly stronger Tuesday morning as traders said the municipal bond market reverted to basic supply and demand patterns.

While the government shutdown and looming debt ceiling debate is on the back of investors' minds, traders said the comparatively niche buyer base of the muni market should keep it insulated from those headlines.

"The muni market is so supply-and-demand oriented that all we needed was a slowdown in redemptions," a Boston trader said. "At these rate levels a lot of projects can't come to market right now so supply won't be a big deal for the rest of the year. All of a sudden there was a bid in the high-yield market last week just because you had positive flows into muni bond funds."

This trader added that going back to Detroit and Puerto Rico, the sellers who wanted to get out of those credits, have done so by now. "So we are seeing pretty stable price levels based on the risk and reward assessment. We've hit the lows on most Detroit bonds."

While investors are concerned about the debt ceiling debate ramping up, most traders agree the U.S. will not default on its debt. Still, the uncertainty could give a push for safety assets. "There's not a chance we are going to default, but that doesn't mean people won't get very afraid to do something," this trader said. "The uncertainty will drive the flight to safe, quality, liquid assets and in a predictable world, you'd see somewhat of a repeat of last time." In July 2011, a debt ceiling debate and subsequent downgrade of the U.S. debt rating from AAA by Standard & Poor's ironically led to a rush to buy Treasuries.

In the muni market Wednesday, Ramirez & Co. priced for retail $575 million of Connecticut general obligation bonds, rated Aa3 by Moody's Investors Service and AA by Standard & Poor's, Fitch Ratings, and Kroll Bond Ratings. Institutional pricing is expected Thursday.

Yields ranged from 0.73% with 3% and 4% coupons in a split 2016 maturity to 3.52% with a 5% coupon in 2027. Bonds maturing in 2015 were offered via sealed bid. The bonds are callable at par in 2023.

Later Wednesday, Siebert Brandford Shank & Co. is expected to price for institutions $463 million of California State Public Works Board lease revenue bonds, following a retail order period Tuesday. The deal includes two series for correctional facilities projects rated A2 by Moody's and A-minus by Standard & Poor's and Fitch, as well as one series for various projects at the California State University rated Aa3 by Moody's and A-minus by Standard & Poor's and Fitch.

In retail pricing Tuesday, yields on the first series of $135.8 million ranged from 0.51% with a 1% coupon in 2015 to 4.70% with a 4.625% coupon in 2033. Bonds maturing in 2014 were offered via sealed bid. Bonds maturing between 2029 and 2032 were not offered for retail. The bonds are callable at par in 2023.

Yields on the second series of $163.5 million ranged from 0.51% with a 5% coupon in 2015 to 4.15% with a 5% coupon in 2028. Bonds maturing in 2014 were offered via sealed bid and portions of bonds maturing between 2026 and 2033 were not offered for retail. The bonds are callable at par in 2023.

Yields on the third series of $163.7 million ranged from 0.80% with a 5% coupon in 2016 to 4.60% with a 4.5% coupon in 2033. Portions of bonds maturing between 2026 and 2038 were not offered for retail. The bonds are callable at par in 2023.

On Tuesday, yields on the triple-A Municipal Market Data scale ended as much as two basis points higher. The two-year yield rose one basis point to 0.37% and the 10-year yield increased two basis points to 2.56%. The 30-year was steady at 4.12%.

Yields on the Municipal Market Advisors scale also ended steady to one basis point higher. The 10-year and 30-year yields increased one basis point each to 2.71% and 4.27%, respectively. The two-year was steady at 0.54% for the ninth consecutive trading session.

Treasuries were stronger Wednesday morning as the government shutdown continued and the debt ceiling debate weighed on investors' minds. A worse-than-expected private sector employment number also pushed a risk-off trade.

The benchmark 10-year yield fell four basis points to 2.61% and the 30-year yield fell three basis points to 3.69%. The two-year yield fell one basis point to 0.33%.

Private-sector employment rose 166,000 in September, according to the ADP monthly national employment report, coming in lower than expected.

"In the absence of government data, we will have to rely on private-survey data like ADP, the ISMs, and the NFIB to judge the state of the September labor market," wrote economists at RDQ Economics. "Although this report fell a little short of expectations, there are a number of positive takeaways.

"First, employment growth over the last three months, at an average of 162,000, is a little ahead of the 152,000 per month seen during the second quarter," the economists added. "Second, the 12-month average growth in ADP employment has been picking up since it bottomed out in April at 148,000 per month. Third, the employment gains in September were broad-based by size of firm, with the fastest growth at the very smallest and the very largest firms, and also by industry, with finance showing the only decline."

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