A strong municipal market Tuesday ignored bouncing Treasuries and pulled investors in from the sidelines with favorable ratios and attractive pricing on new issuance.
Muni yields outperformed those of Treasuries across the curve.
“We had a strong market today,” a New York trader said. “There was moderate activity in the secondary; we saw some good pricing there. And there was certainly firm to strong pricing in the new-issue market.”
Muni yields were firmer across the curve Tuesday, according to the Municipal Market Data scale. They fell two basis points for maturities in 2013 and 2014.
Yields for all other maturities fell between four and seven basis points. Bonds maturing in 2017 closed seven basis points lower.
The benchmark 10-year muni yield fell four basis points Monday to 2.66%, 11 basis points over the past three sessions. It sits 32 basis points beneath its average for 2011.
The 30-year yield also lost four basis points, falling to 4.30%, or 32 basis points under its average for the year.
The two-year yield ticked down two basis points to 0.40%, after 20 straight sessions at 0.42%, and another 17 at 0.44%. It stands at its nadir for the year and 20 basis points below its average for 2011.
Muni ratios to Treasuries, at the long end around 103% and at the 10-year around 92%, were fairly attractive and enticed buyers, traders said. The 10-year closed at levels not seen since April, according to MMD analyst Randy Smolik.
“When you have Treasuries outpace munis for a couple of days, it leaves munis relatively attractive,” said another trader in New York. “That brings in some of the buyers.”
Treasury yields started the day mostly down across the curve and rebounded around noon, only to close mostly lower. At the end, the 10-year yield ended down three basis points to 2.89%, comfortably below 3.00%.
The 30-year yield also fell three basis points to 4.18%. The two-year yield remained unchanged at 0.37%.
Citi fixed-income analysts, led by George Friedlander, see a lasting affinity in the movements of muni and Treasury yields for a time. “Over the longer term, we expect MMD to trade somewhat consistently with Treasuries after allowing for the lag time of a few days versus the Treasury market,” they wrote in a recent report.
On the day, muni gains proved resilient to the midday uptick in Treasury yields, Smolik wrote.
Market participants welcome the healthy new issuance. Muni bonds expected to be sold this week total $5.3 billion, against a revised $878.4 million last week.
Following the holiday-shortened week, new issuance should resemble June’s volume levels once again, when more than $5 billion a week was issued.
All new issuance that’s reached the market this week has been well received, the trader said.
Wells Fargo Securities led Tuesday’s offerings with a retail order period on the largest new deal so far this week. It priced for retail $718.2 million of Dormitory Authority of the State of New York personal income tax revenue bonds.
The bonds are rated AAA by Standard & Poor’s and double-A by Fitch Ratings. Yields range from 0.87% with a 4.00% coupon in 2014 to 4.29% with a 4.25% coupon in 2031. Credits maturing between 2022 and 2025, 2027 and 2030, and in 2041 were not offered for retail.
Siebert Brandford Shank & Co. priced $139.3 million of bonds for San Antonio in two series. They were rated triple-A by the major ratings agencies.
Yields for the first series, $59.5 million in general improvement bonds, range from 0.42% with a 4.00% coupon in 2013 to 4.06% with a 5.00% coupon in 2031. Credits maturing in 2012 were not offered to retail.
Yields for the second series, $79.8 million of tax and revenue certificates of obligation, range from 0.42% with a 4.00% coupon in 2013 to 4.06% with a 5.00% coupon in 2031. Credits maturing in 2012 were not offered to retail.
Bank of America Merrill Lynch repriced for institutions $400.4 million of New York Metropolitan Transportation Authority revenue bonds. The debt is rated A2 by Moody’s Investors Service, A by Standard & Poor’s, and A-plus by Fitch.
Yields were reduced across the curve for the institutional offering, but investor demand was particularly noticeable at the short end. Bonds maturing in 2012 and 2013 were seven basis points lower in the institutional offering than in the retail period Monday.
Yields range from 0.65% with a 2.00% coupon in 2012 to 5.23% with a 5.00% coupon in 2046. Debt maturing in 2024 and 2036 are wrapped by Assured Guaranty Municipal Corp. Maturities in 2026 and 2029 have an optional par call in 2016.
Some muni technicals look strong, and augur well for tax-exempts over the next two months, JPMorgan fixed-income analysts, led by Peter DeGroot, wrote in a recent report.
Barring some unexpected credit event, or a spike in Treasury yields, the collective effect of low supply and substantial cash on the sidelines will be beneficial to liquidity in munis through July and August. Then surplus tax-exempt funding slows down noticeably in September through November, as coupon and redemption flows fade and supply rises.
“We do recognize that average net negative tax-exempt supply of $7.6 billion would result in a highly favorable outlook in most periods; however, the decrease in funding could aversely impact liquidity if rates remain in the current range and tax-exempt origination resets at $6 billion or more per week,” DeGroot wrote.
“This level of supply, if persistent, may be difficult to distribute given the rate environment and the sensitivity of retail buyers and property and casualty investors to absolute rates.”