NEW YORK – Munis are feeling selling pressure Tuesday as safe-haven cash is exiting the fixed income markets and prompting the stock market to climb more than 1%.
Muni yields have been at or near calendar-year lows for the past month, despite a strengthening Treasury market, indicating that buyers were reluctant to see nominal yields fall even further. With Treasuries now reversing course, tax-exempt paper is following.
A midday read from Municipal Market Data shows the most action in the 2029-34 range, where yields have jumped four to six points. Short-term yields were steady, while all others were flat to four basis points higher.
Large as some of those moves are, muni yields are easily outperforming the Treasury market, where bonds are weakening rapidly. The sell-off is led by a 10-basis point softening in the three-year bond. The two-year yield is eight basis points higher at 0.47%, the benchmark 10-year yield is nine basis points up at 3.01%, and the 30-year yield is two basis points higher at 4.32%.
A muni trader in New York said the market hasn’t seen any reason to continue pushing on lower yields, as it was understood the flood of money in the Treasury market was due to the Greek bid. With the Greek situation finding resolution, Treasuries are backing up and munis are forced to soften as well.
“You still have a lot of reinvestment money, and still not much supply,” the trader said, explaining why munis aren’t weakening even further. “Even this week’s supply was one-fifth tobacco bonds. So we’re going to be down six basis points today, but it’s not a real shock.”
A trader in Chicago also said the rise in tax-exempt yields is capped somewhat by the upcoming reinvestment period.
“We have a big rollover coming July 1,” this trader said. “This is the end of the quarter so some people might be doing window dressing and this will be an opportunity to get some things ready for the first.”
Muni yields are also unlikely to follow Treasuries too much as some traders think the sell-off there is overstated.
“We had a Greek tragedy that made the Treasury market scream up,” he added. “In my opinion, this is an opportunity. Rates are low and so the Dow Jones will get stronger and Treasuries will do better.”
The weaker market didn’t stop Houston, Texas, from upsizing its $500 million issuance to $566 million. The airport system subordinate lien revenue refunding bonds, underwritten by Goldman Sachs, are rated A by Standard & Poor’s and A-plus by Fitch.
In fact, the primary market is digesting the deal easily enough for short-end yields to get slashed 10 basis points.
The deal is priced in two series. The larger, $450 million Series 2011A bonds are subject to the alternative minimum tax and carry maturities from 2012 to 2025; yields range from 1.87% in 2013 to 5.18% in 2025.
The remainder, $117 million, is not subject to the alternative minimum tax and has yields ranging from 1.17% in 2013 – 15 basis points lower than in the preliminary pricing – to 4.48% in 2025.
The Chicago trader added the Houston deal won’t affect the market.
“They trade in their own world,” he said. “So overall, I don’t see a lot of things putting pressure on the primary market.”
In Monday’s market, the benchmark 10-year yield once again stayed at 2.63%, while the 30-year yield remained at 4.23% and the two-year yield held at 0.42%.
