Many of the concessions written into this week’s new deals in the municipal primary market are sufficient to push yields up, but not enough to draw buyers.
As yields are skipping up to new levels, it’s bringing out all sorts of sellers. But it’s also creating problems in the secondary market, where liquidity is still hard to find, traders say.
“Some of the major warehousers of municipal securities, who were buy-and-hold the past three months during the rally, are now trying to liquidate their positions,” a trader in California said. “You get a shake-out like this, and all of a sudden you’re at new levels, and that wakes some folks up.”
Municipal bond traders noticed that no one has been eager to stick his neck out for the new issuance. “Everyone’s looking for someone to step forward first, and since they’re not, these deals are coming in at wider spreads and are a little bit more challenging to get done,” a trader in Florida said.
On the competitive side of the market, credits were trading up to 25 basis points wider on the day than where they typically come into the marketplace, the trader said. That would indicate that buyers are not given enough reads, pre-sale.
For negotiated issues, none of the deals seem to have been priced cheaply enough to match the expectations of many of the accounts, he added.
“So the secondary is suffering for that,” the trader said. “Guys are having a very difficult time finding liquidity. Accounts are still finding reasonable liquidity, obviously at adjusted levels. But dealer-to-dealer trades are at significantly lower levels, unless it’s in the inquiry-specific bids.”
But the Florida trader also questioned how much money the community of money managers really has to invest. “Guys tell us they have a ton of cash,” he said. “But their expectations are that they’ll be able to buy at higher rates.”
Tax-exempt yields continue to climb amid the onslaught of new supply, particularly between the four- and 11-year range, according to the Municipal Market Data scale. Yields in that space vaulted 15 to 20 basis points.
Yields for two- and three-year issues increased five and 10 basis points, respectively. Beyond 11 years they were eight to 13 basis points higher.
The 10-year muni yield rocketed 15 basis points Wednesday to 2.44%. It’s risen 47 basis points from its record-low yield on Sept. 23 of 1.97%. The 30-year yield jumped eight basis points to 3.62%. The two-year yield leapt what was, for it, an Olympian five basis points to 0.39%.
Treasury yields also took to the air Wednesday, albeit modestly compared to munis. The benchmark 10-year Treasury yield increased five basis points to 1.89%. The 30-year yield also rose five basis points to 2.86%. The two-year yield remained at 0.26%.
In total, $8.26 billion of new issuance is expected this week. Last week, the market saw a revised $7.69 billion in new supply.
Goldman, Sachs & Co. priced the largest deal of the day, $648.7 million on behalf of Trinity Health Credit Group. Five conduit issuers were involved: the Michigan Finance Authority; the California Statewide Communities Development Authority; Franklin County, Ohio; Montgomery County, Md., and the Illinois Finance Authority. The bonds were rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
Yields for the $325.2 million component of Michigan Finance Authority hospital revenue and refunding bonds ranged from 4.95% with a 4.875% coupon in 2031 to 5.10% with a 5.00% coupon in 2039.
The $106.3 million set of California development authority revenue and refunding bonds was priced at par to yield 5.00% in 2041. The $14.5 million series of Franklin County revenue bonds was priced at par to yield 5.00% in 2040.
For the $63 million series of Montgomery County revenue and refunding bonds, a split maturity in 2040 was priced at par to yield 4.75%, as well as yielded 4.75% with a 5.00% coupon. Yields for the $139.7 million Illinois Finance Authority revenue bond component ranged from 0.65% with a 2.00% coupon in 2012 to 5.00% priced at par in 2030.
Citi priced $599.7 million of Palm Beach County, Fla., Solid Waste Authority refunding revenue bonds. The bonds were rated Aa2 by Moody’s and AA-plus by Standard & Poor’s.
Yields ranged from 0.94% with a 2.00% coupon in 2013 to 4.38% with coupons of 4.25% and 5.00% in a split maturity in 2031. Credits maturing in 2012 were offered in a sealed bid.
Morgan Stanley priced $584.8 million of Texas’ Lower Colorado River Authority transmission contract refunding revenue bonds for the LCRA Transmission Corp. project in two series. The bonds were rated A2 by Moody’s, A by Standard & Poor’s, and A-plus by Fitch.
Yields for the first series, $427.9 million, ranged from 0.84% with a 5.00% coupon in 2013 to 4.60% with coupon of 4.375% and 5.00% in a split maturity in 2041. Debt maturing in 2012 was offered in a sealed bid. There are no more orders for credits maturing in 2013, 2014, 2016, 2019, 2020, 2022, 2023 and 2041.
Yields for the second series, $156.9 million, ranged from 0.84% with a 2.00% coupon in 2013 to 3.57% with a 5.00% coupon in 2023. Debt maturing in 2012 was offered in a sealed bid. There are no orders for credits maturing in 2013, 2014, 2016, 2017 and 2023.
In the competitive arena, Bank of America Merrill Lynch won $280 million of Virginia Public Building Authority public facilities revenue bonds. The bonds were rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch.
Yields ranged from 1.12% with a 5.00% coupon in 2015 to 4.00% priced at par in 2029. Debt maturing in 2012 through 2014, 2019 and 2020, and 2030 and 2031 was sold but not available.