Top-quality municipal bonds made an about face and turned unchanged to weaker by mid-session, traders said, with yields on some maturities strengthening by as much as one basis point.
The primary market was seeing another quiet day, with no bond deals of over $1 million on the calendar.
Secondary Market
The yield on the 10-year benchmark muni general obligation was steady from 1.92% on Monday, while the 30-year yield was as much as one basis point stronger from 2.80%, according to a read of Municipal Market Data's triple-A scale.
In early trade, munis showed strength, with yields on some maturities weakening by as much as two basis points.
Treasury bonds were lower on Tuesday. The yield on the two-year yield rose to 1.07% from 1.01% on Monday, while the 10-year Treasury yield gained to 2.27% from 2.23% and the 30-year Treasury yield increased to 3.00% from 2.94%.
The 10-year muni to Treasury ratio was calculated on Monday at 86.3% compared with 85.0% on Thursday, while the 30-year muni to Treasury ratio stood at 95.3% versus 94.7%, according to MMD.
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."
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar rose $2.28 billion to $5.09 billion on Tuesday. The total is comprised of $2.35 billion competitive sales and $2.75 billion of negotiated deals.
