Munis End Weaker After Treasury Headwinds

After a hefty rally early in the week, the tax-exempt market weakened Wednesday as muni yields followed Treasuries higher. Many deals that came to market raised yields from order periods earlier in the week.

"Munis still feel weak," a New York trader said, and trades were not all going in one direction.

"It's a little weaker," a Los Angeles trader said. "We have headwinds from Treasuries. We have a bit more supply this week and we have to get through that. There are a number of blocks that are out from institutions, so I think we have a couple things to work off of."

Coming off the rally earlier this week, munis are now in a period of adjustment, and he said it remains to be seen whether that lasts through the day or through the rest of the week.

Munis showed weakness according to data compiled by Markit. Of a sample of seven CUSIP numbers, yields all rose between five and 27 basis points. Cuyahoga County, Ohio, 5s of 2017 jumped 23 basis points to 1.33%, while New Jersey Economic Development Authority 5s of 2020 soared 27 basis points to 2.50%. Massachusetts 3s of 2023 and California 5s of 2031 each rose six basis points to 2.49% and 3.04%, respectively.

Munis were weaker Wednesday, according to the Municipal Market Data scale. Yields inside five years were steady. The six- and seven-year yields rose one basis point while yields outside eight years jumped two and three basis points.

On Wednesday, the two-year yield closed steady at 0.33%. The 10-year yield jumped three basis points to 1.97% and the 30-year yield increased two basis points to 3.34%.

Treasuries were weaker. The two-year yield was flat at 0.29%. The benchmark 10-year yield rose four basis points to 2.03% and the 30-year yield increased six basis points to 3.19%.

In the primary market, Morgan Stanley held its second day of retail for the largest deal of the week, $1.3 billion of California various-purpose general obligation bonds, rated A1 by Moody's Investors Service and A-minus by Standard & Poor's. In the first retail-order period, individual investors bought $329 million of bonds, or about 25% of the total offering.

Yields on the first series, $890 million of new money, ranged from 0.68% with a 3% coupon in 2014 to 4.45% with a 4.375% coupon in 2042.

Credits maturing in 2035 and portions of 2042 were not offered for retail. The bonds are callable at par in 2022. Yields were unchanged from the first retail order period.

Yields on the second series, $410.2 million of refunding bonds, ranged from 0.68% with 3% and 4% coupons in a split 2014 maturity to 3.17% with a 5% coupon in 2024.

Portions of credits maturing in between 2014 and 2022 were not offered for retail. The bonds are callable at par in 2022. Yields were unchanged from the first retail pricing.

"The California deal is doing just OK," the Los Angeles trader said. "The first day was alright. There is a lot more wood to chop there, so we'll see how we do in day two, but usually there is a good fall-off. I've heard they could potentially accelerate the institutional order period, but there isn't enough of a book right now to accelerate."

Barclays Capital was expected to hold a second day of retail but moved up its institutional order period on $555 million of Connecticut taxable and tax-exempt GOs and SIFMA index bonds. The credit is rated Aa3 by Moody's and AA by Standard & Poor's and Fitch Ratings.

The first series, $212.4 million of SIFMA index bonds, had maturities ranging from 2014 to 2020 and were priced 25 basis points to 135 basis points above the SIFMA index. Credits maturing in 2013 were offered via sealed bid.

The second series, $259.6 million of GOs, ranged from 2.08% with 3%, 4%, 5% and 2% coupons in a split 2021 maturity to 3.55% with 3.5% and 4% coupons and 3.30% with a 5% coupon in a split 2032 maturity. The bonds are callable at par in 2022. Yields were raised two to six basis points across the curve from retail pricing. The third series included $83 million of taxable bonds.

Siebert Brandford Shank & Co. priced $219.1 million of Pennsylvania Turnpike Commission revenue bonds in two series.

The first series, $123.7 million of Turnpike subordinate revenue bonds, is rated A3 by Moody's and A-minus by Standard & Poor's and Fitch. Yields ranged from 0.95% with a 3% coupon in 2013 to 4.46% with a 5% coupon in 2042. The bonds are callable at par in 2021.

The second series, $95.4 million of motor license fund-enhanced Turnpike subordinate special revenue bonds, is rated Aa3 by Moody's and AA by Fitch. Yields ranged from 0.60% with a 2% coupon in 2013 to 3.94% with a 5% coupon in 2042. The bonds are callable at par in 2021.

In the competitive market, Citi won the bid for $211.4 million and $50.9 million of Maryland Transportation Authority revenue bonds, rated A2 by Moody's, A by S&P and A-minus by Fitch. Pricing details were not available by press time.

In the secondary, trades reported by the Municipal Securities Rulemaking Board showed firming over the past week.

A dealer sold to a customer Michigan 2.125s of 2018 at 2.03%, 19 basis points lower than where they traded last Thursday.

A dealer bought from a customer Dormitory Authority of the State of New York 5s of 2039 at 3.61%, 15 basis points lower than where they traded last Thursday.

A dealer bought from a customer San Francisco Airport Commission 5s of 2027 at 3.37%, seven basis points lower than where they traded Monday.

A dealer sold to a customer Delaware 5s of 2017 at 0.83%, three basis points lower than where they traded last week.

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