Municipal bonds participated in a safe-haven trade on Wednesday following the Treasury-led rally on Tuesday, but by the end of the day there was some resistance to the post-rally levels, according to John Donaldson of Haverford Trust.
“We have seen investors — including ourselves — willing to buy bonds that were at the levels present before the weekend, but not willing to purchase offerings that were marked up in synch with the move in U.S. Treasuries,” Donaldson said.
At the same time, however, Donaldson said any balances from recent offerings that had not been sold or marked up looked attractive Wednesday.
“Demand from available funds seems more in balance,” he said. “We see a sharp reduction in proceeds from called/refunded bonds.”
Municipals’ outperformance of corporate and Treasury bonds this year through Tuesday has appealed to investors, according to Donaldson.
For example, while year-to-date total return has been negative, municipals returned 0.40% compared with 0.81% for Treasuries and 2.36% for corporates, according to Donaldson, citing Bloomberg Barclays data. “As long as pricing is reasonable, we would expect new issues to be well received,” Donaldson added.
“Our sense is that few market participants want to chase aggressive pricing.”
Secondary market
Municipal bonds were stronger on Wednesday, according to a late read of the MBIS benchmark scale. Benchmark muni yields fell as much as two basis points in the one- to 30-year maturities.
High-grade munis were also stronger, with yields calculated on MBIS’ AAA scale falling by as much as two basis points across the curve.
Municipal Market Data’s AAA benchmark scale was unchanged, with yields steady in the 10-year general obligation muni and flat in the 30-year muni maturity.
Treasury bonds turned weaker as stock prices moved up.
On Wednesday, the 10-year muni-to-Treasury ratio was calculated at 84.8% while the 30-year muni-to-Treasury ratio stood at 95.2%, according to MMD. The muni-to-Treasury ratio compares the yield of tax-exempt municipal bonds with the yield of taxable U.S. Treasury with comparable maturities. If the muni/Treasury ratio is above 100%, munis are yielding more than Treasury; if it is below 100%, munis are yielding less.
Earlier in the day, impact over the geopolitical concerns about Italy and Spain continued to be evident in the market.
“What you saw yesterday was somewhat or a replay of what we saw in Brexit two years ago,” John Mousseau, managing director of municipals at Cumberland Advisors said on Wednesday morning.
There was a swift reaction by equity markets and a flight to quality in U.S. Treasury debt with a backdrop of geopolitical concerns in Italy and Spain, he noted.
“The backing and filling process begins today, just as you saw two years ago after a down 700 Dow day,” Mousseau said. “Investors focus more locally and realized things were OK. We expect this to be similar.”
He expects that with some volatility in the stock market, there will be little leakage from the June and July reinvestment period.
“Most of that will come back into the muni market, which should augur well — particularly for intermediate and longer munis, which is where the value is,” Mousseau added.
Previous session's activity
The Municipal Securities Rulemaking Board reported 38,364 trades on Tuesday on volume of $8.15 billion.
California, New York and Texas were the states with the most trades, with the Golden State taking 14.549% of the market, the Empire State taking 13.086% and the Lone Star State taking 9.874%.
Primary market
On Wednesday, Bank of America Merrill Lynch priced the South Carolina State Port Authority’s $325 million of Series 2018 revenue bonds subject to the alternative minimum tax.
BAML priced Fort Collins, Colo.’s $129.82 million of tax-exempt and taxable electric utility enterprise revenue bonds on Wednesday.
In the competitive arena on Wednesday, the Brainerd Independent School District No. 181, Minn., sold $143.58 million of GOs under the Minnesota credit enhancement program.
BAML won the deal with a true interest cost of 3.6063%.
Also on Wednesday, the Las Vegas Valley Water District, Nev., competitively sold $100 million of GO water improvement bonds which are additionally secured by pledged revenues.
UBS Financial won the bonds with a TIC of 3.5860%.
Since 2008, the district has sold about $3.6 billion of bonds with the most issuance occurring in 2016 when is offered $606 million of securities. The district did not come to market in 2013.
Wednesday’s bond sales
South Carolina:
Colorado:
Minnesota:
Nevada:
Bond Buyer 30-day visible supply at $11.27B
The Bond Buyer's 30-day visible supply calendar increased $2.44 billion to $11.27 billion on Wednesday. The total is comprised of $5.68 billion of competitive sales and $5.59 billion of negotiated deals.
Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.
