Top-quality municipal bonds ended weaker on Tuesday, traders said, as yields on some maturities rose by as much as two basis points.
Meanwhile, the primary market saw another quiet day, with no bond deals of over $1 million on the calendar.
The yield on the 10-year benchmark muni general obligation rose one basis point to 1.93% from 1.92% on Monday, while the 30-year yield was up two basis points to 2.82% from 2.80%, according to the final read of Municipal Market Data's triple-A scale. Trading was quiet, according to Interactive Data.
In earlier trade, munis had showed strength, with yields on some maturities weakening by as much as two basis points. But that was before U.S. Treasury bonds faded as oil prices surged.
Treasury bonds were lower in late trading as a barrel of oil was up by about 2.5%. The yield on the two-year Treasury rose to 1.09% from 1.01% on Monday, while the 10-year Treasury yield gained to 2.30% from 2.23% and the 30-year Treasury yield increased to 3.04% from 2.94%.
The 10-year muni to Treasury ratio was calculated on Tuesday at 83.7% compared with 86.3% on Monday, while the 30-year muni to Treasury ratio stood at 92.7% versus 95.3%, according to MMD.
Among the more actively traded issues, California's Golden State Tobacco Securitization Corp.'s Series 2007A tobacco settlement asset-backed current interest revenue 5 3/4s of 2047 were yielding 6.31% compared with 6.24% on Monday, according to Markit data.
The Puerto Rico Commonwealth Series 2014A general obligation 8s of 2035 were yielding 11.76% compared to 11.67% on Monday, Markit said.
Primary Market
The primary market saw another very quiet day, with no bond deals of over $1 million on the calendar.
"In general, December is a slow new issue month, but 2015 was particularly sensitive to this theme, as the further fall in energy and commodity prices at the start of December added credit pain and uncertainty, Janney analyst Jody Lurie wrote in a Tuesday market comment. "Further, although the Fed's liftoff seemed priced in already, the narrative around cost of debt capital is changing. The primary market can spur activity in the secondary market, and a lack of new issuance can carry into trading volumes as well."
She added that the heightened absence of traders during the holiday season was another reason for low activity, but said that "both investment-grade and high-yield dollar volumes have been operating well below their respective trailing 12 month averages for about two weeks now," she wrote.
MSRB Previous Session's Activity
The Municipal Securities Rulemaking Board reported 25,018 trades on Monday on volume of $2.52 billion.
SEIX: In Praise of GO Strengthening Laws
After several high-profile Chapter 9 bankruptcies, municipal market investors are questioning the strength of the local government general obligation bond pledge, according to SEIX Investment Advisors' December market comment.
Recently, a few of the states which allow their municipalities to declare bankruptcy have passed legislation giving statutory lien protection to locally issued GOs, SEIX wrote in the report, which was released on Monday.
"Securing local GO bondholders with a statutory lien is a credit positive that is necessary post-credit crisis as it enhances bondholder security and improves investor transparency," SEIX wrote.
The full faith and credit pledge is used by municipalities as a promise to repay debt with all of its available financial resources.
"All GOs are not equal and vary significantly from state to state, and even within a state, depending on the assigned GO security," SEIX wrote. "GO pledges can be unlimited (GOULT: all legally available revenues) or limited (GOLT: restrictions or caps on available tax revenue). While the GO pledge is a contract, it has been treated as an unsecured claim in recent Chapter 9 bankruptcies, which is a significant change from the past."
In California, a law goes into effect on Jan. 1 that automatically creates both a secured lien on any new local GOs issued in the state and a lockbox structure that takes revenue for that debt before it goes to the issuer. California will join Colorado with the strongest security for local GOs in the U.S.
"We have generally favored revenue bonds over local GOs since the Great Recession because of the local sector's high political risk and growing unfunded pension and other post-employment benefit liabilities," SEIX wrote. "In addition, the treatment of pension debt as being on par or senior with bond debt in recent high profile bankruptcies has increased the perception of credit and headline risk within the local sector. Providing a statutory lien to GOs enhances bondholder security and may also improve an issuer's ability to negotiate pension reform with employee unions. While the credit quality of the issuer's financial condition will remain the primary factor in our fundamental analysis, we believe that local GO credits that reside in states that provide a statutory lien will outperform those that do not, and we applaud the states that have secured local GO bonds."
