The municipal market, amid moderate activity and slight firming, caught a rare glimpse of the elusive retail investor Wednesday.
Disregarding rock-bottom yields for the moment, they evidently saw enough from the day’s new issuance to slip away from their adapted habitat on the sidelines to participate, even as Treasury yields mostly rose in the day’s trading.
“Munis were firm; they didn’t participate in any of this Treasury downdraft,” a New York trader said. “We saw better business from retail today, moderate activity. It seemed like some of them were back today. There was not a lot of institutional bid-wanteds out.”
Retail investors were drawn to the day’s new issuance, particularly on some of the housing deals, according to Tim Coffin, vice president at Fidelity Capital Markets.
The secondary market, though, was more dominated by the professionally managed accounts, he added.
“When retail sees an opportunity like on some of these housing deals, they’re reacting to it,” Coffin said. “They may be selective, but when they see something that has got a little extra yield to it, they seem to be reacting to it. They are focused, but picking their spots.”
But industry pros said it was too early to determine if retail investors are beginning to accept the past couple of months’ trench-deep yields as a more lasting trend, and are adjusting accordingly.
Tax-exempt yields closed Wednesday flat across the front end of the curve, according to the Municipal Market Data scale. Maturities between 2019 and 2028 fell one basis point. Those beyond 2028 dropped two basis points.
The benchmark 10-year yield Tuesday reached a new MMD record after falling one basis point to 2.09%. It has fallen 15 points since Sept. 1.
The 30-year yield ticked down two basis points on the day to 3.68%, its lowest level since Sept. 28.
The two-year yield remained unchanged at 0.30% for a 20th consecutive session, hovering at its lowest level in more than 40 years.
Treasury yields, which have been rallying for the past few days, closed higher on Wednesday. The 10-year benchmark yield rose seven basis points to 2.05%, though still remarkably low for the year.
The 30-year yield jumped 11 basis points to 3.37%. The two-year yield remained unchanged 0.21%.
The market has seen six straight weeks of outflows to muni bond funds, according to Lipper FMI numbers. Most recently, investors pulled $282 million.
But a trader in California has been seeing retail investors allocate money increasingly to financial advisors and into separately managed accounts. “And that’s 10-years-and-shorter money,” he said. “That’s where there’s been more demand.”
Mostly, there were too many long-standing factors at play that pushed munis throughout the day, according to MMD analyst Randy Smolik. Rising Treasuries alone weren’t enough to pull municipals along for a ride.
“Lack of primary selling pressure, high ratios to taxables, and a secondary thin on trading blocks all added to the buoyant feel in the munis,” he wrote in a research post. “Even though Treasuries floundered today, the volatility was not enough to distract the tax-exempt market from the technicals working in this market’s favor.”
Though the week is shortened by the Labor Day holiday, new-issuance volume is still expected to be higher than last week’s.
Industry estimates place the total for the week at almost $3 billion, versus a rather slight $1.72 billion last week. Most of the biggest deals are expected to reach the market later in the week.
In one of the largest issues this week, Siebert Brandford Shank & Co. priced for retail $355.2 million of New York State Thruway Authority state personal income tax revenue bonds. The bonds were rated AAA by Standard & Poor’s and AA by Fitch Ratings.
Yields range from 0.48% with coupons of 3.00% and 4.00% in a split maturity in 2014 to 2.59% with coupons of 4.00% and 5.00% in a split maturity in 2022. Debt maturing in 2012 and 2013 were offered in a sealed bid.
JPMorgan priced for retail $199.2 million of Indianapolis Local Public Improvement Bond Bank bonds. The bonds, which are wrapped by Assured Guaranty Municipal Corp., have underlying ratings of A1 by Moody’s Investors Service and A by Standard & Poor’s.
Yields range from 1.30% with a 4.00% coupon in 2013 to 4.00% with coupons of 4.00% and 5.00% in a split maturity in 2023.
Credits maturing between 2024 and 2027 aren’t available for retail.
Morgan Stanley priced $175 million of Cape Coral, Fla., water and sewer refunding revenue bonds. The bonds, wrapped by Assured Guaranty, have underlying ratings of A1 by Moody’s, A-minus by Standard & Poor’s, and A by Fitch. Yields range from 0.69% with a 2.00% coupon in 2012 to 4.93% with a 5.00% coupon in 2041.
Since repricing, yields are roughly three basis points firmer on the short end, seven basis points lower at the 10-year mark, and 12 basis points lower at the 20-year mark.
Piper Jaffray priced $87 million of Texas A&M University Board of Regents system Permanent University Fund bonds. The bonds are rated triple-A by all three agencies.
Yields range from 0.40% with a 2.00% coupon in 2013 to 3.67% with a 5.00% coupon in 2031. Since repricing, yields have fallen three basis points in the medium and long-ends of the curve.
The deals are finding an investor group hungry for the right kind of value, a Texas trader said. “Even the few large deals that come,” he said, “if they’re high-grades, or appealing to crossover buyers, given where Treasuries are, they continue to take supply out of the market.”
Furthermore, Texas A&M is always going to get an aggressive price, he added. That’s because the permanent university fund is considered one of the best regarded university fund endowments in the U.S. Crossover buyers, in particular, would find it attractive.
The equities markets saw strong gains in all three major indexes throughout the day. They closed the trading session higher by at least 2.47%, with the Dow Jones Industrial Average up almost 275 points.