Muni yields rose more on Tuesday than any other day in five weeks, but participants said trading was light and selling pressure was modest as safe-haven cash exited the fixed-income markets and pushed the stock market up more than 1.20%.
“Considering what the Treasuries did, we did pretty well,” a trader in New York said. “You couldn’t have a Treasury market perform like that for two days in a row and not have us react.”
The benchmark 10-year muni yield rose four basis points to finish at 2.67%, breaking an eight-day trend of holding steady, according to Municipal Market Data. That marks its highest yield since May 12; its calendar-year low of 2.59% was reached May 17.
Bonds maturing in 2032 saw yields jump six basis points, on average, while other spots on the scale moved three to five basis points higher. Anything within five years was flat.
Large as some of those moves were, munis easily outperformed the Treasury market, where bonds began the session with higher yields and then saw prices weaken throughout the day. Yields for Treasuries in the three-, five-, and seven-year range rose more than 12 basis points.
The two-year yield closed the day nine basis points higher at 0.49%, the benchmark 10-year yield jumped 11 basis points to 3.04%, and the 30-year yield climbed four basis points to 4.33%.
A trader in Chicago said the fallout from Treasuries to munis was capped somewhat by the upcoming reinvestment period.
“We have a big rollover coming July 1,” the trader said. “This is the end of the quarter so some people might be doing window dressing and this will be an opportunity to get some things ready for the first [of the month].”
Muni yields have resisted breaking through calendar-year lows for the past six weeks, despite continued strength in the Treasury market. The 10-year Treasury yield plummeted 26 basis points from May 19 to June 24, while the triple-A rated 10-year muni yield hardly budged, merely falling one basis point.
That stubbornness indicated at least two things. One, that buyers were reluctant to see already unappetizing yields on high-grade tax-exempt paper fall even further, and two, that muni traders were well aware the recent flight to quality was due almost solely to temporary problems in Greece.
With Treasuries reversing course Monday and Tuesday, tax-exempt paper is following. But as is common with these two markets, munis prove their stability by underperforming on the flight-to-safety bid and outperforming on the subsequent sell-off.
“You still have a lot of reinvestment money, and still not much supply,” a New York trader said, explaining why munis didn’t weaken even further. “Even this week’s supply was one-fifth tobacco bonds. So it’s not a real shock.”
This week marks the fourth consecutive one with at least $5 billion of new supply. Before June, there hadn’t been back-to-back weeks of more than $5 billion all year, and issuance has been roughly half that of last year’s.
“The street’s preference for high-grade muni bond exposure following months of limited supply seemed to peak earlier this month as competitive high-grade new issues were sold,” MMD analyst Randy Smolik wrote in a daily note. “The market became saturated rather quickly and heavy balances from high-grade new issues [became] indicative of a less aggressive high-grade buyer base.”
Muni yields are unlikely to follow Treasuries too much higher as some traders think the sell-off there is overstated.
“We had a Greek tragedy that made the Treasury market scream up,” the Chicago trader said. “In my opinion, this is an opportunity.”
The weaker market didn’t stop Houston from upsizing its $500 million issuance to $566 million. Their airport system subordinate-lien revenue refunding bonds, underwritten by Goldman, Sachs & Co., were rated A by Standard & Poor’s and A-plus by Fitch Ratings.
The primary market digested the deal easily enough for short-end yields to get slashed 10 basis points on the first part of the series and 15 basis points on the second.
The $450 million of Series 2011A bonds are subject to the alternative minimum tax and carry maturities from 2012 to 2025. Yields ranged from 1.87% in 2013 to 5.18% in 2025.
The remainder, $117 million, is not subject to the AMT and has yields ranging from 1.17% in 2013 to 4.48% in 2025.
The Chicago trader added the Houston deal won’t affect the market.
“They trade in their own world,” he said. “So overall, I don’t see a lot of things putting pressure on the primary market.”
The biggest issue to price Tuesday was from New York’s Tobacco Settlement Financing Corp. via Barclays Capital. It brought to market $975.6 million of asset-backed revenue bonds in two series, each rated AA-minus by Standard & Poor’s and Fitch.
Yields on both series ranged from 0.93% in 2013 to 2.75% in 2018.
In the taxable world, the Oklahoma Student Loan Authority sold $205.2 million of floating-rate notes based on the London Interbank Offered Rate. The debt boasts gilt-edged ratings from Standard & Poor’s and Fitch, matures in 2040, and yields 115 basis points over the three-month Libor. Bank of America Merrill Lynch was underwriter.
Among short-term notes, the San Diego Unified School District sold $218 million of tax and revenue anticipation notes. Underwritten by JPMorgan, the notes mature in July 2012 with a 0.23% yield on a 2% coupon.
Puerto Rico was also in the market selling $304 million of new-money general obligation bonds, the first such offering in nearly three years. Details should become available in Wednesday’s institutional pricing.
