The tax-exempt market grew firmer this week as deals were priced to go in what was one of the largest primary slates of the year.
Still, traders described the market as bifurcated, as the short end of the curve traded stronger than the long end.
“There was a lot of supply this week and most deals were priced to move,” said Tom DeMarco, fixed income strategist at Fidelity Capital Markets. “It definitely seemed like a bifurcation. The front end was well-bid but the long end seems soft. But deals were definitely put away.”
Indeed, issuers lowered yields on the front end of the curve but many had to raise yields on the long end to meet demand.
In the primary, deals were very well received. JPMorgan priced $1.4 billion of New Jersey Turnpike Authority turnpike revenue bonds, rated A3 by Moody’s Investors Service, A-plus by Standard & Poor’s and A by Fitch Ratings. Yields were lowered as much as 12 basis points in institutional pricing Wednesday from retail pricing Tuesday.
Wells Fargo Securities priced $900 million of New York City Transitional Finance Authority tax-exempt, future tax-secured subordinate revenue bonds, rated Aa1 by Moody’s and AAA by Standard & Poor’s and Fitch. In institutional pricing, yields were lowered about three basis points from the final retail wire on maturities inside 2025, but were increased as much as three basis points on the long end. Yields had already been lowered about three basis points from the initial retail wire.
Barclays priced $420 million of California State Public Works Board lease revenue bonds, rated A2 by Moody’s, A by Standard & Poor’s and BBB-plus by Fitch. Yields were lowered as much as four basis points on the short end from retail pricing and raised up to four basis points on the long end.
In the secondary market, trading was selective. “The secondary was spotty,” DeMarco said. “Business was getting done but it’s selective. There was a lot of activity from real buyers on the front end of the curve but an avoidance of lower coupons. It was spotty but 5s were well received.”
Others agreed activity was mixed. “The secondary in munis picked up on Monday after Treasuries were buoyed early from a flight-to-safety bid after the Cyprus news was announced,” wrote Dan Toboja, vice president at Ziegler Capital Markets, adding that after weeks of a sell-off, the market welcomed the firmer tone.
But by mid-week, much of the euphoria had cooled. “The long end has plenty of bonds around,” Toboja said. “Bid sides are sporadic for yield and trading has taken the semblance of just inquiry matching as dealers are hesitant to carry more inventory. Dealers are only putting small amounts of cash to work in thinking the rally over the last several days may only be temporary. Cyprus has given the muni market’s pullback a pause, but there is still plenty of trepidation in the market.”
Still, secondary trading activity was strong this week, according to the Municipal Securities Rulemaking Board.
On Monday, there were 37,956 trades, down from the 30-day average of 40,115 trades. Par value traded was $8.113 billion, down from the 30-day average of $10.11 billion.
Activity picked up Tuesday as there were 44,331 trades, up from the 30-day average of 40,321 trades. Par value traded was $10.165 billion, down just slightly from the 30-day average of $10.525 billion.
Wednesday also showed activity with 44,330 trades, up from the 30-day average of 40,400 trades. Par amount traded was $13.512 billion, up from the 30-day average of $10.623 billion.
On Thursday, there were 42,357 trades, up from the 30-day average of 40,325 trades. Par value traded was $15.151 billion, well above the 30-day average of $10.710 billion.
In retail trades of under 100 bonds — or $100,000 par value — secondary activity was stronger this week than the past several weeks, according to data from BondDesk Group.
There were 62,613 buy trades for the week ending March 20 compared to the previous week’s 61,725 buy trades. The number of buy trades was also higher this week than the previous five weeks. Sell trades were also up significantly to 37,236 versus the previous week’s 35,812 trades. The number of sell trades was higher than the previous five weeks.
The ratio of buy trades to sell trades came in at 1.7; the ratio has been 1.6 or 1.7 for the previous five weeks.
Dollar volume traded was about on par this week as the previous week. There were $1.729 billion buy trades for the week ending March 20 compared to the $1.711 billion buy trades for the week before. Sell trades were also on par at $1.053 billion versus the previous week’s $1.032 billion sell trades.
The ratio of buy trades to sell trades in dollar amount came in on par with previous weeks at 1.6.
Through Thursday, yields on the 10-year Municipal Market Data triple-A GO scale fell five basis points from 2.00% last Friday, while the 30-year yield dropped four basis points from 3.14% at the end of last week.
Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale ended two basis points lower through Thursday on the 10-year and 30-year yields, falling from 2.03% and 3.22% last Friday.
Treasuries ended stronger for the week. As of Friday morning, the benchmark 10-year yield dropped six basis points to 1.94% from 2.00% at the end of last week. The 30-year yield fell six basis points for the week to 3.16% from 3.22%. The two-year was steady at 0.26%.
The recent softness in the market is likely to continue, DeMarco said, even with a drop in supply next week. “March and April have been somewhat soft with positive net supply, a drop in redemptions in April, and tax season which can be a tough time for munis,” he said. “So I’m expecting underperformance.”
And indeed, ratios have risen to 100% and DeMarco expects them to stay that way. “We will probably stay above 100% versus Treasuries especially as we move into April and supply starts to pick up,” he said. “Ratios will remain pressured until we clear this historically weak time period.”
And he added there is opportunity to be found between the five- and 10-year spot on the curve. “I tend to like the seven-year part of the curve,” he said. “Five-year ratios are around 109% and 10-year ratios are around 101% so we are focused inside there.