Munis Crumble After Hitting Resistance Level

Like a bad soufflé, the tax-exempt market collapsed Wednesday under the weight of new issuance and falling Treasury prices. The largest deal of the week was priced for institutions amid the market’s freefall.

Most traders agree that yields will go up — it’s just a matter of time. “This market is going to take a big hit,” a New York trader said. “I’m hitting down big bids. I think it’s a 10 to 15 basis point cut.”

As the general market was being cut across the curve, Bank of America Merrill Lynch priced for institutions $780.1 million of New York State Thruway Authority second general highway and bridge trust fund bonds, rated AA by Standard & Poor’s and Fitch Ratings, following a retail order period Tuesday.

Yields ranged from 0.47% with 3% and 5% coupons in a split 2014 maturity to 3.50% priced at par and 3.47% with a 5% coupon in a split 2032 maturity. Credits maturing in 2013 were not formally reoffered. The bonds are callable at par in 2022.

The deal held up well compared to the rest of the market and prices were bumped from retail pricing. “With the New York State Thruway loan managing some bumps around the 20-year range, this area could be the best performance on the curve,” according to Municipal Market Data’s Randy Smolik.

Munis caved after struggling Tuesday, according to the MMD scale. Yields on the two- to three-year rose three basis points while the four-year yield jumped seven basis points.

The five- to 17-year munis were hit the hardest with yields rising 10 to 13 basis points. Outside 18 years, yields spiked up eight and nine basis points.

On Wednesday, the two-year yield closed three basis points higher at 0.30%. The 10-year yield jumped 13 basis points to finish at 2.17 while the 30-year yield rose 9 basis points to close at 3.40%.

The last time the two-year hit that level was Feb. 6. The 30-year yield hasn’t risen to the level since Jan. 10. The 10-year muni rose to levels not seen yet in 2012, and is the highest since Dec. 5, 2011.

Treasuries spent their day crumbling. The two-year yield rose six basis points to 0.41%. The benchmark 10-year yield and the 30-year yield jumped 16 basis points to 2.29% and 3.42%.

“The market is loving yieldier investment-grade paper right now,” a New York municipal analyst tweeted, mentioning higher-yield deals that have all been priced well in the last few weeks, including ones from Puerto Rico, California and Illinois.

In other deals, B of A Merrill priced for institutions $206 million of Dormitory Authority of the State of New York bonds for New York University, following a retail order period Tuesday.

The credit is rated Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s. Pricing information was not yet available.

In the competitive market, Boston auctioned nearly $240 million of general obligation bonds in three deals, rated Aaa by Moody’s and AA-plus by Standard & Poor’s.

B of A Merrill won the bid for $122 million. Yields ranged from 0.30% with a 5% coupon in 2014 to 3.40% with a 4% coupon in 2032.

Credits maturing in 2013, 2015 and between 2018 and 2022 were sold but not available. The bonds are callable at par in 2022.

JPMorgan won the bid for $88 million. Details were not available.

B of A Merrill won the bid for $28.2 million. Yields ranged from 0.18% with a 2% coupon in 2013 to 1.33% with a 5% coupon in 2018.

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