The $145 million New Mexico severance bonds that came to market on Tuesday were priced too high, investors say.
J.P. Morgan Securities won the bid for the bonds and priced them with yields ranging from 0.15% with a 2% coupon in 2015 to 1.63% with a 5% coupon in 2024.
"These are [priced at] 116.7 in 2024, that's absolutely awful," a trader in New Mexico said. "We will definitely pass."
The bonds are callable at par in 2019. The bonds are rated Aa1 by Moody's Investors Service and AA by Standard & Poor's.
"The yields are weak, but [New Mexico] is always pretty weak," a trader in California said.
Market participants have been complaining that many of recent issuances, especially recent competitive issuances, have been priced too richly when they come to market. Since the beginning of the month yields for two-year AAA munis have fallen by four basis points to 0.34%, by 13 basis points to 2.19 for the 10-year, and by 17 basis points to 3.44% for the 30-year, according to Municipal Market Advisor data.
"The AAA municipal 10yr and 30yr yields have now recovered 70% of losses incurred between May 1 and September 5 of last year," Municipal Market Advisors wrote in a report released on Monday.
The market has been selling off the last three days but only by a couple basis points, according to Municipal Market Data's triple-A scale. Municipal Market Advisors reported that while yields for some maturities along the curve rose as much as three basis points, the 2-year and 10-year's yields held steady and the 30-year's yields only rose by one basis point to 3.44%.
Municipal yields rose slightly in the intermediate and long-ends of the curve on Tuesday increasing by up to one basis point for eight- to 15-year maturities, as much as two basis points for 16- to 24-year maturities, and up to one basis point for 25- to 30-year maturities, according to Municipal Market Data.
"No, yields rising has not been meaningful, they've only increased by a couple basis points," the trader in New Mexico said. "The yield curve has come down in recent weeks and there has been a bond grab. There is too much demand for very limited supply."
Market participants said many investors will still buy the expensive bonds because there has been low supply this year, and they have no real choice.
"Lots of customers are running into a difficult decision," a trader in Florida said. "They have cash but don't have a lot of places to put it."
He said investors are waiting for a higher interest rate environment to buy bonds. The Federal Reserve's Federal funds rate currently ranges between zero and 0.25%, and has for years.
"The time value sitting on cash is really hurting them at this point," he said.
A trader in New York said investors might soon have to purchase bonds at spreads which with they are uncomfortable.
The trader in New Mexico said investors should just spend their cash light-heartedly.
"I think that's an amateur's approach to protect yield by buying just any old bond, it's a wiser move to protect your credit quality," he said.
He recommended investors buy placeholder bonds with virtually no risk and not much yield, and wait for a better day to come.
"You might buy very simple bonds that are high-grade with a short maturity as a parking place for cash to hide out while you wait for better yields to come," he said. "Many are tempted to take on higher risk or go longer, but we are not doing that. We want to protect our credit quality."
TD Securities won the bid for Dekalb County, Ga.'s tax anticipation notes, the other large negotiated deal scheduled for Tuesday. The deal was downsized by $24.3 million to $85.7 million. The bonds are not yet rated.
On the negotiated side RBC Capital Markets will price $111.5 million of New Hope Cultural Education Facilities Finance Corporation student housing revenue bonds for the state of Texas on Tuesday. The deal is rated Baa1 by Moody's.
Treasuries strengthened Tuesday afternoon, with the 10-year benchmark falling three basis points to 2.52% and the 30-year yields slipping one basis point to 3.38%. The two-year note slid one basis point to 0.35%.
