NEW YORK – The tax-exempt market will look for leadership in the primary market Tuesday as munis search for direction. On Tuesday morning, trading activity picked up in the long end of the curve as yields jumped a few basis points.
“It’s a slow start to a Tuesday and most of the activity we saw was in the back end of the curve,” said a trader in Florida. “All the trades this morning suggest one to two basis points weaker. It’s a little steeper in the curve driven by the back end.”
The trader added that in the front end, the market is being selective. “There are not a lot of trades within 10-years.” The belly of the curve has been quiet.
“There are a couple deals being priced that the market place is looking at,” the trader said. “That will give us more clarity. We were definitely not falling in line with Treasuries yesterday and we had a hard time creating enough supply to keep up.”
Tax-exempt yields were rising on the long end of the curve, according to the Municipal Market Data scale. Yields inside 18-years were steady, while yields beyond 2030 rose up to two basis points.
On Monday, the two-year yield closed at 0.42% for its fifth consecutive trading session. The 10- and 30-year yield closed down one point each to 2.29% and 3.70%, respectively.
In Tuesday morning trading, Treasury yields moved slightly higher as investors felt confident enough to move into more risky assets. The two-year Treasury yield moved up one basis point to 0.25%. The 10-year Treasury yield was up two basis points to 2.04% and the 30-year yield moved up three basis points to 3.09%.
The primary market today will see an influx of deals, as the holiday-shortened week pushes most issuers to come to market in the earlier part of the week.
In the negotiated market, Morgan Stanley is expected to price $417.5 million of student loan revenue bonds in two series for Iowa Student Loan Liquidity Corp.
BMO Capital Markets is expected to price $214.84 million of Chicago general obligation bonds. The $200 million taxable series were priced Monday – a day ahead of schedule.
Bank of America Merrill Lynch is also expected to price $333.7 million of Massachusetts Water Resources Authority general revenue refunding bonds.
On the competitive calendar, Florida will auction $159 million of public education capital outlay refunding bonds, rated Aa1 by Moody’s Investors Service and AAA by Standard & Poor’s and Fitch Ratings.
Clark County, Nev., will sell $124.06 million in revenue bonds, rated Aa3 by Moody’s and AA-minus by Standard & Poor’s.
Munis are cheap and getting cheaper as muni-to-Treasury ratios are increasing, according to MMD analyst Daniel Berger. Ratios “are high and will get higher as more debt is issued this quarter,” he noted.
The five-year muni-to-Treasury ratio closed yesterday at 136.8%, and the 10-year ratio closed at 114.5%. The 30-year ratio is 121.7%. Ratios have not approached these high levels since early 2009.
