Muni, Treasury Yields Back Up in Sell-Off

The municipal market witnessed the unwinding of the Federal Open Market Committee's Operation Twist as yields for tax-exempts and Treasuries backed up in the day's sell-off.

The weaker tone in the muni market carried over from Monday and accelerated somewhat from the morning. Still, industry pros described the sell-off as orderly.

The few large new offerings that hit the market helped create some flow, but there would have been next to nothing if they weren't around, a trader in New York said. The secondary was mostly quiet, as few people did much bidding on munis, he added.

"And if they are bidding, they're certainly being a little more cautious, bidding an extra eighth or quarter or three-eighths into the bonds. It seems like everyone's waiting for something to happen. Maybe we'll see some real softening across the curve; we could really use it."

Tax-exempt yields weakened across all but the front of the curve Tuesday. They were steady out to two years, according to the Municipal Market Data scale.

Yields between three and six years ended up three to five basis points. Those beyond six years were five to seven basis points higher.

The 10-year muni yield jumped seven basis points on Tuesday to 2.09%. It has erased entirely the rally that brought it to a record low of 1.97% late last week.

The 30-year yield climbed five basis points on the day to 3.52%, up eight basis points from its all-time low. The two-year yield remained at 0.32% for a ninth straight session.

"Yields are just not attractive," the trader said. "It's a very, very difficult phone conversation to sell at some of these yields."

Treasury yields were also weaker Tuesday. But the rate increases follow incredible rallying at the intermediate and longer parts of the curve last week, and so are rising from otherwise extreme lows.

The benchmark 10-year Treasury yield leaped nine basis points to 1.99%.

The two-year yield inched up one basis point to 0.25%.

The 30-year yield, which plunged as much as 53 basis points last week, rose eight basis points to 3.08%.

It also climbed 10 basis points during Monday's session.

The market expects a small decrease in new supply for this week, after a considerable increase in issuance last week.

This week, the market expects an estimated $6.83 billion in new supply. Last week saw a revised $7.86 billion of volume.

Many large deals were slated to come to market Tuesday. Minnesota led the way in the competitive market with three series of general obligation offerings that totaled $769 million.

In the largest of those, Bank of America Merrill Lynch won $445 million of Minnesota GO various-purpose bonds.

Yields ranged from 0.52% with a 5.00% coupon in 2014 to 3.85% with a 4.00% coupon in 2031.

Debt maturing in 2012, 2013, 2017, 2018, 2021, 2022, 2024, 2026 and 2027 was sold but not available.

JPMorgan won the second series, $320 million of Minnesota trunk highway GOs. Yields ranged from 0.22% with a 3.00% coupon in 2012 to 3.85% with a 4.00% coupon in 2031.

JPMorgan also won the third and final series, $4 million of taxable Minnesota GOs.

The bonds mature in 2016 with a 1.35% coupon and are priced to yield 30 basis points over the five-year Treasury.

The bonds are rated Aa1 by Moody's Investors Service and AA-plus by Standard & Poor's and Fitch Ratings.

The state on Tuesday canceled two of the five series in what originally was a $922 million competitive GO offering. The two canceled refunding series total slightly more than $150 million, according to a statement the Minnesota Management and Budget office released on the sale.

"Management and Budget opted not to take bids on refunding a proposed $152 million in bonds due to market conditions," the office said. "With the low interest rates, the sale would have caused larger premiums and possible tax implications for the state."

The state was pleased with the results, according to Kristin Hanson, assistant commissioner for treasury and debt management, who directed the bond sale. "The bond sale went extremely well," she said in a statement. "The market is particularly favorable at the current time, so we are pleased with the bids we received."

MMD analyst Randy Smolik suggested in a research post that spreads on prices for the state's new GOs showed how the picture in Minnesota isn't that clear to Wall Street.

"The wide spread differences underscored uncertainty in fair value by the Street over the state losing its triple-A rating by Standard & Poor's," he wrote.

In other competitive news, Bank of America Merrill Lynch also won $159.5 million of Arizona Transportation Board transportation excise tax revenue bonds for the Maricopa County regional area road fund. The bonds were rated AA-plus by Standard & Poor's.

Yields ranged from 0.69% with a 5.00% coupon in 2014 to 3.00% priced at par in 2025. Credits maturing in 2012, 2013, and 2016 were sold but not available.

On the negotiated side, Citi priced $1 million of Port Authority of New York and New Jersey taxable muni consolidated bonds.

The bonds were rated Aa2 by Moody's and AA-minus by Standard and Poor's and Fitch. Yields on the long end were 185 basis points versus Treasuries.

The equities markets rallied far into the afternoon before cooling at the close. Still, the major indexes ended up from Monday's close by at least 1.07%. The Dow Jones Industrial Average closed up almost 147 points.

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