The municipal bond market staged another rally Thursday, with certain yields falling as much as four basis points to finish a third straight session firmer.
“The new-issue pricings were all firm and seem to be fairly well received,” said a trader in New York. He called secondary activity “moderate” and said yields improved only slightly overall, but that the muni rally took on importance given the modest sell-off in Treasuries.
The benchmark 10-year tax-exempt yield fell four basis points to 3.18%, according to the Municipal Market Data triple-A scale. The two-year yield dropped three basis points to 0.65%, and the 30-year yield declined two basis points to 4.80%.
“Munis established strong gains early and did not show much evidence of retrenching,” Randy Smolik wrote in his daily commentary for MMD. He attributed part of the strength to a light calendar next week.
A trader in Los Angeles said the rally extended to the West Coast.
“We’re seeing a little bit of it too, but I can’t say it’s too strong — just a couple of basis points,” he said. “The days of seeing one- to five-basis point climbs seem to have stopped.”
The Bond Buyer 20-bond index of 20-year general obligation yields rose two basis points in the week to 5.06%. The 11-bond index of higher-grade 20-year GO yields rose one basis point to 4.79%
The revenue bond index, which measures 30-year revenue bond yields, fell three basis points to 5.58%, while The Bond Buyer one-year note index fell three basis points to 0.44%.
The recent firming reverses a four-week trend of rising yields. The benchmark 10-year yield had jumped as much as 37 basis points in less than four weeks to end at 3.27% last Friday, but in the last three days it rallied nine basis points.
One exception to the declining yields was The Bond Buyer’s 40-bond municipal bond index, which is based on 40 long-term municipal bond prices. Its weekly average yield to maturity rose one basis point to 5.70%.
“From a technical point of view, we seem to have stopped correcting,” the Los Angeles trader said. “But price discovery remains a problem to some degree. We’re getting closer and closer to tax date and we’re starting to see more activity. That’s helped to stabilize things and I’ve seen a couple of deals go well.”
The question is whether this rally has legs owing to new demand, or whether municipal bonds are simply latching on to the broader flight to quality at a lag.
“The market has obviously been better this week, but I’m not reading any long-term trends into it,” said Michael Zezas, muni strategist at Morgan Stanley.
“What really hasn’t changed that much is the market’s lack of conviction in its own pricing,” he added. “There hasn’t been a long-enough trend of robust market activity to say that we’re in a really healthy pricing environment.”
The Bond Buyer’s 30-day visible supply, which measures the volume of bonds expected in the next 30 days, was just $7.114 billion on Thursday. It measured $9.3 billion in mid-January, and the first quarter ended up seeing the slimmest volume for any quarter in 11 years.
Traders described the market this week as precarious — demand only looks strong relative to how shallow the primary market is. Broad concern about the market’s ability to digest a heavy slate of supply, particularly if it’s low grade, remains a dominant concern.
An April 8 MMD survey found that only 9% of traders were bullish over the next one to two months, whereas 73% were bears.
“The concern is you walk in one Monday and visible supply jumps from $7 billion to $30 billion — that it could just creep up on you suddenly,” the Los Angeles trader said. “We’ll be staring that in the face, wondering how the market will absorb it.”
He added: “It’s a concern the market has been talking about all year, but we’re now in mid-April and we still don’t see it. At best I’d have to say there is just a rumor of supply.”
A research report published Thursday by BlackRock said these issues are driving muni prices recently, not the Treasury market. They see “little correlation” between the two markets.
“Negative investor sentiment is obvious in the lack of demand for longer-dated municipals and the reluctance to take on credit or liquidity risks,” the report says. “Investor cash either remains on the sidelines or is being diverted into the more compelling equity markets.”
Still, though Treasuries failed to provide much direction Thursday — the two-year and 10-year yields gave up two and three basis points, respectively — the broader flight-to-quality earlier in the week certainly played a role in directing muni yields lower.
Among the group of new buyers is a small but growing base of high-net-worth investors who seek to diversify their portfolio holdings to out-of-state bonds, according to Harris May, president of Rye Brook, N.Y.-based Strategic Partners Investment Advisors.
May told The Bond Buyer’s New York Tri-State Public Finance Conference Wednesday that issuers are beginning to benefit from the strategy, which was traditionally limited to institutional investors. Retail investors are usually most interested in local bonds, which can be exempt from city, state, and federal taxes.
“Some issuers will have a wider audience for their bonds because of the willingness of traditional buyers in California, New York, and Massachusetts to consider going out of state for diversification,” May said Thursday, expanding upon his initial comments. “For sure, it’s a rising trend.”
Treasuries were volatile this week but the overall trend was clearly one of strengthening. The 10-year Treasury yield fell eight basis points from last Friday to 3.49%, while the two-year yield finished five basis points down at 0.76% and the 30-year yield declined nine basis points to 4.54%.
New issuance in the week also provided guidance, particularly as the week’s biggest deal — $900 million of Liberty Development Corp. bonds — was postponed. The deal now sits on the day-to-day calendar; underwriter Goldman, Sachs & Co. declined to offer comment on when it would be priced. The delayed deal helped New York paper price particularly well.
“The market began the week looking at close to $5 billion of issuance, and that looked like a big number for 2011,” Zezas said. “So when you took $1 billion off of that, it alleviated a lot of pressure. Supply didn’t have to be the factor that most influenced your investment decisions.”
In a light new-issue market Thursday, Morgan Stanley priced revenue bonds for the Pennsylvania Turnpike Commission.
The $241.25 million deal was priced in two series. One was rated A3 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch Ratings; the other, enhanced by a payment stream from the Motor License Fund, was rated AA3 by Moody’s and AA by Fitch.
Yields on both series were unchanged from Wednesday’s retail pricing. The lower-rated bond yields ranged from 4.86% in 2022 to 6.25% in 2041, which for in-state buyers in the highest tax bracket translates into a taxable equivalent range of 7.71% to 9.92%.
The enhanced tax-exempt bonds yielded between 4.21% in 2022 to 5.60% in 2041.
In the competitive market, JPMorgan won $150 million Michigan taxable GO bonds at a net interest cost of 4.06%. The deal is rated Aa2 by Moody’s and AA-minus by Standard & Poor’s. The state is borrowing to finance loans to help local school districts cover their debt-service payments. It’s the state’s first GO sale this fiscal year. The bonds mature from 2014 through 2023.
JPMorgan has been a huge player in competitive bids this year. It participated in one-quarter of all deals from January through March, easily ranking it first in the field.”