After firming in the early afternoon, the tax-exempt market ended Monday weaker, ahead of what is expected to be the year’s largest week of new issuance.
“I think mixed stories are the way you have to look at this,” a trader in Chicago said. “Over the weekend, there were positive stories so if you look at it from a default risk perspective, I think there is a certain comfort level with our product. But what stares at us in the face is the calendar that keeps building.”
He added that some market participants are looking to move out of positions because there is a big calendar and supply is coming in this week.
Other participants may not have the same type of supply in the pipeline and want to keep some bonds on the shelf so they can have a better bid, the trader said.
“So on a day like today, people turn their cards over and see who has capital at their disposal,” he said.
Indeed, most traders spent Monday preparing for the nearly $12 billion that is expected to hit the market this week.
“It was a slow start Monday with the focus on new issues,” a trader in Atlanta said. “It’s pretty much unchanged but I’d say it’s a little weaker with the big supply coming.”
“The week is gearing up with a number of Texas bank qualified deals,” a trader in Dallas said. “The market is plugging along and it looks as if there are deals heading into December.”
A trader in New York said the market has “picked up a little,” but also that it’s “still a very slow Monday with volume down about 15% here compared to last Monday.”
Munis looked “off a couple” but light volume made it difficult to track, the trader said.
The trader in Chicago said demand is very specific as customers are looking for income and capital preservation.
“We’ll see what prices Tuesday and with bigger blocks that are out there, they will recognize a price break. If the product doesn’t exist elsewhere, I don’t think there is pressure to go out, especially with state products,” he said.
“If you’re in a high tax state and there are not a lot of bonds around, you’re holding a very strong hand,” he added.
In the end, it comes down to what drives the tax-exempt market.
“Munis are driven not ultimately by the macro picture and not ultimately by Treasuries,” the Chicago trader said. “Munis are driven by supply and we are facing the perception of growing supply through the end of the year.”
Munis ended down weaker across the curve, according to the Municipal Market Data scale. Yields were unchanged on the short end and rose a basis point in the six- and seven-year range. Yields on eight- and nine-year maturities rose two basis points. Yields on credits maturing between 2021 and 2034 increased three basis points while yields on credits maturing between 2035 and 2036 jumped four basis points. Yields on the long end of the curve spiked up five basis points.
The two-year muni yield closed flat at 0.42% for the ninth consecutive trading session. The 10-year yield closed up three basis points to 2.28% and the 30-year finished up five basis points to 3.78%.
Treasuries painted a different picture, with yields jumping up in morning trading and then finishing down across the curve. The two-year was steady at 0.24% while the benchmark 10-year closed down two basis points to 2.04%. The 30-year yield finished down three basis points to 3.08%.
In the primary market, Barclays Capital priced for retail $450 million of New York City Municipal Water Finance Authority water and sewer revenue bonds. The bonds are rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings. Institutional pricing is expected Tuesday.
A 2039 split maturity yielded 4.2% with coupons of 4.125% and 5%. Debt maturing in 2044 was not offered for retail. The bonds are callable at par in 2021.
Barclays also priced $146.8 million of Ohio general obligation refunding bonds in three series. The bonds are rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch.
Yields on the first series, $100 million of common schools GO refunding bonds, ranged from 1.67% with 5% and 4% coupons in a 2017 split maturity to 2.24% with 5% and 4% coupons in a 2019 split maturity. Credits maturing between 2020 and 2022 were not offered for retail.
Yields on the second series, $27.9 million of higher education GO refunding bonds, ranged from 2.49% with a 4% coupon in 2020 to 2.8% with a 5% coupon in 2022.
Yields on the third series, $18.8 million of infrastructure improvement GO refunding bonds, ranged from 1.67% with a 3.5% coupon in 2017 to 2.8% with a 4% coupon in 2022.
Trades in the secondary market reported by the Municipal Securities Rulemaking Board showed mixed results throughout the day. In early afternoon, munis were firming.
The trader in Dallas concurred. “I was doing trades today that didn’t feel like there was pressure on the bonds,” he said.
A dealer sold to a customer Spokane, Wash., School District 5s of 2030 at 3.64%, 10 basis points lower than where it traded last Thursday.
Bonds from an interdealer trade of Virginia Public Building Authority 5.5s of 2027 yielded 3.71%, 10 basis points lower than where they traded Thursday.
Bonds from an interdealer trade of Williamson County, Texas, 5s of 2025 yielded 3.20%, two basis points lower than where they traded Thursday.
However, by later Monday afternoon munis were weakening.
Bonds from an interdealer trade of Tennessee Housing Development Agency 4.5s of 2031 yielded 3.93%, 31 basis points higher than where they traded last Thursday.
A dealer bought from a customer Louisiana State University and Agricultural and Mechanical College 5s of 2032 at 3.94%, eight basis points higher than where they traded Thursday.
A dealer sold to a customer New York City Transitional Finance Authority 5s of 2023 at 3.05%, five basis points higher than where they traded Thursday.
On a different CUSIP, a dealer sold to a customer New York City TFA 5s of 2022 at 2.88%, four basis points higher than where they traded last Thursday.
“The focus for several muni participants was paring down inventory, making room for the attractive bonds that will be provided in the primary this week,” wrote MMD analyst Randy Smolik. “Exiting bonds was not easy.”