The municipal market ended slightly firmer on the day, benefiting from disappointing news from the Euro zone, adequate interest in high-grade blocks, and a solid performance in the retail pricing for one of the week’s largest new deals, coming out of California.
“Our market got stronger today,” a trader in New York said. “There was moderate activity and firm new-issue pricing.”
Though munis performed well in spots, the tax-exempt sector is being pulled in two directions, Municipal Market Data analyst Randy Smolik wrote in a report Tuesday.
“Muni-Treasury ratio-minded buyers keep reaching for blocks every time the Treasury market surges,” he said. “Cash buyers see no value in absolute levels and resist following the crossover herd. With large-block high-grades trading firmer in the seven to 11-year range especially, peripheral high-grade markets are dragged reluctantly along.”
Tax-exempt yields saw firming at spots throughout the curve Tuesday, according to the MMD scale. Yields for debt maturing from 2012 to 2016 and from 2024 to 2035 were unchanged.
Maturities in 2017 to 2022 were one to three basis points lower. And those maturing in 2023 and from 2036 to 2041 were two basis points lower.
Munis yields dropped across most of the curve. The 10-year muni yield slid three basis points to 2.23%, its lowest since Sept. 2.
The 30-year muni yield fell two basis points to 3.86%, its lowest level since Nov. 1. And the two-year muni yield stayed at 0.30%, its lowest yield in more than two years.
Treasury yields mostly firmed on the day. The benchmark 10-year Treasury yield fell seven basis points to 2.23%, the same level as the muni 10-year. The 30-year yield dropped 10 basis points to 3.67%. The two-year yield held steady at 0.20%, two basis points above its all-time low.
Treasury yields rallied somewhat in the early afternoon after the financial markets learned of no specific progress made on the need for Euro bonds from German Chancellor Angela Merkel and French President Nicolas Sarkozy, who spoke in Paris Tuesday following a meeting.
The markets were also disappointed to hear little from the two leaders about any plans to expand the Euro rescue fund. Both would have helped ease fears across global markets regarding the growing crises afflicting the economies of several countries tied to the common European currency.
The amount of new issuance this week is expected to more than double last week’s total.
Volume should rise to around $5.28 billion from the meager $2.25 billion of municipal bond sales seen last week, according to industry estimates.
The industry is focusing on two new deals. Morgan Stanley Tuesday priced for retail $970.5 million of California Department of Water Resources power supply revenue bonds. The bonds are rated Aa3 by Moody’s Investors Service, AA-minus by Standard & Poor’s and AA by Fitch Ratings.
Yields range from 0.37% with a 3.00% coupon in 2013 to 2.66% with a 5.00% coupon in 2021. Maturities are split for debt in 2013, 2015, 2018, 2020 and 2021.
At repricing, yields for two-year credits firmed three basis points. Institutions are expected to be able to participate on Wednesday.
The deal came in five basis points wider than indications on Monday, Smolik wrote in a recent report, adding that it was generally well-received.
But the New York trader said the pricing was inconclusive. “It’s a strong underlying credit,” he said. “But retail pricing didn’t tell us anything particularly good or bad about the California market.”
Even though the deal concerned the state of California, a different trader in New York said it was important for the market as a whole. “The California DWR deal provides direction for the deals we do here,” he said. “It definitely puts a little bit of pressure on the underwriters here when they come out with notes, to get aggressive with their levels, and so forth. … If it comes cheap, you’ll see New York buyers going out of state, paying the tax, and picking it up. I’ve had guys do that before.”
Also on tap, Morgan Stanley is expected to price more than $1 billion of Indiana Finance Authority wastewater utility revenue bonds. The bonds should be priced for retail on Wednesday, and for institutions the following day.
The stock market indexes finished all lower from Monday’s close by at least 0.67%. The Dow Jones Industrial Average closed down by almost 77 points.
Economic news on the day was mixed. The Commerce Department reported Tuesday that housing starts fell 1.5% to a seasonally adjusted annual rate of 604,000 units in July. It was the first decrease in three months and fell below economists’ predictions.
On the up side, the Federal Reserve reported Tuesday that industrial production increased 0.9% in July.
It represented the largest gain in seven months, led by an increase in production in the utilities sector.
Economists anticipated an increase of 0.4% for production, according to the median estimate from Thomson Reuters.