Municipal bonds were weaker at mid-session, according to traders, as the last big sale of the week came to market.
Primary market
Wells Fargo Securities priced the Minnesota Higher Education Facilities Authority’s $125.69 million of Series 2017 revenue and refunding bonds for Carleton College.
The issue was priced to yield from 0.90% with a 3% coupon in 2018 to 3.61% with a 4% coupon in 2042; a 2044 maturity was priced as 5s to yield 3.28% and a 2047 maturity was priced as 4s to yield 3.71%.
The deal is rated Aa2 by Moody’s Investors Service.
Since 2007, the Minnesota HEFA has sold about $1.09 billion of securities, with the most issuance occurring last year when it issued $174 million. The authority has issued less than $100 million five times over the past 10 years, with a low of $6.7 million in 2014.
Bond Buyer visible supply
The Bond Buyer's 30-day visible supply calendar decreased $1.29 billion to $10.38 billion on Thursday. The total is comprised of $3.19 billion of competitive sales and $7.19 billion of negotiated deals.
Secondary market
The yield on the 10-year benchmark muni general obligation rose as much as one basis point from 2.13% on Wednesday, while the 30-year GO yield gained as much as one basis point from 3.01%, according to a read of Municipal Market Data's triple-A scale.
U.S. Treasuries were higher on Thursday morning. The yield on the two-year Treasury dipped to 1.26% from 1.27% on Wednesday, while the 10-year Treasury yield dropped to 2.29% from 2.31%, and the yield on the 30-year Treasury bond decreased to 2.95% from 2.97%.
On Wednesday, the 10-year muni to Treasury ratio was calculated at 92.2%, compared with 91.5% on Tuesday, while the 30-year muni to Treasury ratio stood at 101.3%, versus 100.6%, according to MMD.
MSRB: Previous session's activity
The Municipal Securities Rulemaking Board reported 45,464 trades on Wednesday on volume of $13.78 billion.
Tax-exempt money market fund outflows
Tax-exempt money market funds experienced outflows of $651.5 million, bringing total net assets to $128.50 billion in the week ended April 24, according to The Money Fund Report, a service of iMoneyNet.com. This followed an outflow of $1.19 million to $129.15 billion in the previous week.
The average, seven-day simple yield for the 232 weekly reporting tax-exempt funds increased to 0.42% from 0.39% the previous week.
The total net assets of the 859 weekly reporting taxable money funds increased $10.51 billion to $2.486 trillion in the week ended April 25, after an outflow of $9.59 billion to $2.476 trillion the week before.
The average, seven-day simple yield for the taxable money funds was unchanged at 0.42% from the prior week.
Overall, the combined total net assets of the 1,091 weekly reporting money funds increased $9.85 billion to $2.615 trillion in the week ended April 25, after outflows of $10.78 billion to $2.605 trillion in the prior week.
What do tax changes mean for munis?
Traders on Thursday were still trying to sort out the implications of President Trump's tax proposal released on Wednesday.
Several analysts pointed to the implications of state and local income taxes no longer being deductible on one’s federal tax return.
“…In California [for example] the top state tax rate is currently 13.3% on income over $1 million," John Mousseau, director of fixed income at Cumberland Advisors, said in a report on Thursday. "…Eliminating both the federal deduction for state income taxes and the Obamacare tax means that a current California taxpayer in the top bracket will face the full 13.3% tax rate.”
As a result of this, he said, demand for in-state tax-exempt bonds in high-tax states like California and New York would climb, pushing yields down relative to other munis. The plan would lead to pressure on state and local governments to skip any tax increases or roll back tax rates if possible, he noted.
“…We feel that muni bonds, particularly in the intermediate and longer maturities, should face little adjustment under the proposed plan and that the demand for municipal bonds in high-tax states should advance smartly,” he concluded.
State and local groups, however, were concerned about the future of the tax-exemption on municipal bond interest.
“We are extremely concerned that President Trump’s proposal includes eliminating the deductibility of state and local taxes. Eliminating or capping federal deductibility for state and local property, sales and income taxes would represent double taxation, as these taxes are mandatory payments for all taxpayers. We fundamentally believe that Americans’ income, property and purchases should not be taxed twice,” according to a statement jointly issued by the National Governors Association, National Association of Counties, National League of Cities, U.S. Conference of Mayors, International City/County Management Association, National Conference of State Legislatures and The Council of State Governments.
“We urge Congress to maintain the state and local deduction and the tax exemption for municipal bond interest. We will work with Congress to ensure that states and local governments have the tools we need to foster healthy, safe and vibrant communities,” the group said.
But at least one sector of the muni market could see a benefit, some analysts said.
“The proposed tax legislation had its bombshells like losing the deductibility of state and local taxes,” Municipal Market Data Senior Market Analyst Randy Smolik said in a Thursday market comment. “But, as far as tax-exempts are concerned, they will maintain their tax-exemption. AMT bonds could be poised to perform given Alternative Minimum Tax may be on the chopping block.”
