So far, the municipal market has been tested and is holding firm.
For a third straight day in a busy week, muni demand has stared a massive amount of new product square in the face and yields have not flinched. This fact shows so far that supply fears aren’t holding up, a trader in California said.
“We’ve got a firm market, at least,” he said. “With decent supply this week, it’s a good sign, certainly in the near term, that it seems to be absorbed without real concessions to the scales. And the fact that we’re unchanged today, in the face of a weaker Treasury market, all kinds of sovereign debt concerns, whether it’s on this side or the other side of the pond, you have to think the market is in pretty good shape.”
As a case in point, munis on Wednesday were steady across the curve, according to the Municipal Market Data scale. In fact, muni yields haven’t budged in four trading sessions.
The benchmark 10-year tax-exempt yield ended flat on the day at 2.66% for the seventh straight day, at 32 basis points below its average for 2011.
The two-year yield also held at 0.40% for a seventh consecutive day, its low for the year. The 30-year yield remained at 4.32% for a fourth straight session, 30 basis points under its average for 2011.
Treasury yields were mostly higher on the day, with the exception of the short end of the curve. This follows Tuesday afternoon, when the long end fell rather dramatically. The 10-year yield jumped seven basis points to 2.94%.
The 30-year yield leaped eight basis points to 4.26%. The two-year yield held steady at 0.38% throughout the day.
The industry has been watching this week’s primary market rather closely to weigh how it receives the new issuance. So far the reception has been largely positive, with some concessions.
But most deals have been reasonably well-priced and have seen strong demand, traders say.
The new issuance total for the week is expected to hit $8.27 billion, versus a revised $5.71 billion last week. It is shaping into the largest volume for new debt offerings so far in 2011 in the primary market.
Two large competitive issues from Washington State reached the market Wednesday. Citi won the first, $391 million of various purpose general obligation bonds.
The bonds are rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.
Yields range from 0.70% with a 3.00% coupon in 2014 to 4.60% with a 4.50% coupon in 2036. Debt maturing from 2018 to 2021, 2026, and 2030 was not formally reoffered.
Bank of America Merrill Lynch won the second, $238.4 million of Washington Motor Vehicle fuel tax GO bonds. The bonds are rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch.
Yields range from 0.20% with a 2.00% coupon in 2012 to 4.65% with a 4.50% coupon in 2037.
Credits maturing in 2014, 2034, 2035 and from 2038 and 2041 were sold, but not available.
Citi won $329.3 million of Wisconsin GO bonds. The bonds are rated Aa2 by Moody’s and AA by Standard & Poor’s and Fitch.
Yields range from 0.95% with a 5.00% coupon in 2015 to 4.13% with a 5.00% coupon in 2032. Credits maturing in 2013 and 2014 were not formally reoffered.
On the negotiated side, Siebert Brandford Shank & Co. priced $440.4 million of Atlanta airport general revenue refunding bonds in two series. The bonds were rated A1 by Moody’s and A-plus by Standard & Poor’s and Fitch.
Yields for the first series, at $224.2 million, range from 0.85% with a 4.00% coupon in 2013 to 3.55% with a 4.00% and a 5.00% coupon in a split maturity in 2021.
Yields for the second series, at $216.2 million, range from 0.97% with a 3.00% coupon in 2012 to 5.15% with a 5.00% coupon in 2030.
But if the industry were wondering about whether it had the capacity to absorb the surge in supply, then one examination of the large sums of maturing bonds and coupon payments should go some ways to reassure skeptics, according to recent report published by a research team at DWS Investments, part of Deutsche Bank’s asset management division, led by Philip Condon, its head of municipal bond portfolio management.
Maturing bonds and notes, as well as coupon payments, over the three-month period of June to August should come to $136 billion, a number the DWS report cites. If all of that were reinvested in the market, it would theoretically absorb about all of the expected supply for the remainder of 2011.
“We are not expecting all of it to be reinvested,” DWS wrote. “From what we’ve seen with our own funds, shareholders typically reinvest about two-thirds or more of the dividends they receive.”
After Tuesday afternoon’s late rally with the 30-year Treasury yield on news of progress in the negotiations for a solution to the debt-ceiling issue, the long-term muni-Treasury ratio improved. The 30-year ratio rose to 103% of comparable Treasuries, MMD numbers showed.
The number placed munis at almost their cheapest level to Treasuries over the past 30 days, where the average has been around 100%. “Percentages got better with Treasuries running,” a trader in New York said. “So, munis are nominally more attractive.”
In economic news, the National Association of Realtors reported that existing home sales dropped 0.8% in June to a seasonally-adjusted annual rate of 4.77 million sales.
It marks the third straight drop, as an increase in contract cancellations produced lower sales figures.
May sales were an unrevised 4.81 million. Economists anticipated 4.95 million sales for the month, according to the median estimate from Thomson Reuters.