Despite some strength in the afternoon, most municipal bond yields rose Wednesday as Treasuries experienced another significant sell-off.
“Munis were weaker in sympathy with Treasuries,” a trader in Florida said. “It seems like the bigger dealers are heavy and are relaxing their bids. That’s part of the problem.”
Longer-term municipal bond yields increased up to three basis points at the open, reversed course in the early afternoon, and ended up one or two basis points higher.
The benchmark 10-year yield rose another two basis points to 3.25%, its highest level since Feb. 15, according to Municipal Market Data’s triple-A scale. The 10-year yield has now climbed 35 basis points since March 16.
All maturities eight years and out saw yields rise two basis points, MMD said, with the 30-year yield now offering 4.82%, or 104% of the comparable Treasury rate.
Shorter-term notes were mostly stable, with four- and five-year maturities even firming by up to two basis points.
“Since the start of this week, cash has been chasing high-grade blocks in the 4-to-5 year range despite low ratios,” Randy Smolik wrote in his daily commentary for MMD.
“People are buying the real high-grade names, but it’s spotty,” a trader in New York added. “There’s not huge demand. Retail is very slow. The business we’re seeing is strictly institutional bidding and buying. It’s picky buying — there’s no sense of urgency.”
Taking advantage of yield tightening earlier in the day, the New York City Transitional Finance Authority pushed up its refunding offering to $650.2 million from an original $500 million.
“We were pleased that strong demand by both retail and institutional investors allowed us to upsize our refunding,” said New York City deputy budget director Alan Anders.
Anders said the two-day retail period sold “a very strong $283 million,” including $208 million on Monday.
The appetite allowed the two dozen underwriters, led by Wells Fargo Securities, to cheapen the deal one to three basis points in certain spots.
The future tax-secured subordinate bonds were offered in two series with tax-exempt yields ranging from 0.28% in 2011 to 4.15% in 2025.
Tom Doe, chief executive at Municipal Market Advisors, pointed out how attractive the deal is by noting that the 10-year yield, at 3.77%, represents a taxable equivalent yield of 5.8%.
When one takes into account the triple-whammy tax-exemption from city, state, and federal taxes, the equivalent yield is north of 6% for those in the top tax bracket, he noted.
Not bad, considering the bonds were rated AAA by Standard & Poor’s and Fitch Ratings, and Aa1 by Moody’s Investors Service.
But a New York trader said the story is different for lower-rated credits.
“I’m worried about lack of flow, lack of turnover,” he said. “I mean, if it’s not high-grade bonds, who are you going to sell it to?”
Indeed, Philadelphia downsized its general obligation offering to $253.8 million from the original $272.2 million.
The bonds were rated A2 by Moody’s, BBB by Standard & Poor’s, and A-minus by Fitch. JPMorgan was lead underwriter.
The Florida trader said bonds in the single-A range were struggling to find buyers. “The bid side is cheaper, that’s all there is too it,” he said.
The retail period on Tuesday was better, when about $90 million was sold following estimates of just $50 million, said Nancy Winkler, the city’s treasurer.
Aside from a sealed bid for 2011 maturities, yields were offered from 1.63% in 2012 to 5.98% in 2031.
Assured Guaranty Municipal offered credit enhancement on the Philadelphia bonds maturing in 2016, 2020, 2023, and 2026. The bonds were rated Aa3 by Moody’s and AA-plus by Standard & Poor’s.
The general weakening of munis didn’t look too bad relative to Treasuries, which have seen a broad sell-off this week in part based on hawkish comments from Federal Reserve officials.
The concern is that the Fed this year could prematurely end its program of quantitative easing and-or hike its overnight lending rate, which has been below 0.25% since December 2008.
The 10-year Treasury note finished Wednesday at 3.55%, six basis points higher than Tuesday’s close and 12 basis points higher than on Monday.
The two-year yield gave up two basis points to finish at 0.85%, its highest yield since February 14. That follows a five basis point loss on Tuesday. With the two-year muni standing still Wednesday, it now offers 91.5% of comparable Treasuries versus 81.9% one day before.
Performance on the 30-year Treasury was worse: its yield rose eight basis points to 4.59%, the highest in a month.
“Treasuries threatened to undermine tax-exempts,” Smolik wrote.
Another trader in New York said munis were forced to weaken give the kinds of losses in Treasuries.
“We have nothing else to put our hands on,” he said. “It’s the only game in town.”
The New York trader called Wednesday’s activity light to moderate, adding that traders were still waiting to see what happens in the stock market and in Treasuries.
“People have the same reluctance to buy municipal bonds,” the trader said. “We are protected to a degree by the lack of new supply, but at the same time we need it for price transparency.”
Many traders have been saying yields will jump further once a batch of new supply enters the market.
One trader in New York said he wasn’t convinced of this.
“One thing we know, is that we don’t know,” he said. “We’ve seen so many times where supply has actually helped the market. Everyone is saying the same thing — 'when supply comes, be careful’ — and that seems like it’s probably going to happen. But I’ve seen it where it doesn’t happen, you know?”
Elsewhere in the negotiated market, Goldman, Sachs & Co. offered for institutions $114.9 million of bonds for the Kentucky Turnpike Authority.
The par amount offered has expanded since the retail period Tuesday, when $112.6 million was priced for retail. The bonds were rated Aa2 by Moody’s, AA-plus by Standard & Poor’s, and AA-minus by Fitch.
Yields ranged from 2.34% in 2016 to 4.99% in 2031.