The tax-exempt market ended firmer Thursday for the second session after struggling at the beginning of the week.
Overall, traders said new deals were priced attractively and well-received, considering supply could make this week one of the year’s largest for new issuance. Still, there are some bonds on the shelf, the traders noted, and said there could be further weakening to entice buyers.
“It was the biggest issuance week of the year and there was support,” a Chicago trader said. “But there are a lot of bonds around, though, so it’s dangerous. Things were received well and priced properly this week, but with that being said, I thought we were set to outperform, and we didn’t. So spreads could continue to widen and bonds get cheaper in order to move those balances.”
By Thursday, the largest deals in the primary had been priced and attention turned to the secondary. “We are trading some new issues coming back to the Street,” a New York trader said.
Munis strengthened for a second session Thursday after weakening Monday and Tuesday, according to the Municipal Market Data scale. Yields inside six years were steady, while yields outside seven years fell as much as three basis points.
On Thursday, the 10-year yield fell two basis points to 1.87% while the 30-year yield dropped one basis point to 3.17%. The two-year was steady at 0.32% for the 10th straight session.
Treasuries were weaker after a choppy week. The benchmark 10-year yield jumped three basis points to 1.63%, while the 30-year yield increased two basis points to 2.73%. The two-year yield rose one basis point to 0.31%.
In the negotiated market, Bank of America Merrill Lynch priced $162.1 million of Berks County, Pa., Municipal Authority fixed-rate revenue bonds for the Reading Hospital and Medical Center Project, rated Aa3 by Moody’s Investors Service, AA by Standard & Poor’s and AA-minus by Fitch Ratings.
The bonds yielded 4.23% with a 5% coupon in 2040, 4.50% with 4.25% and 4.5% coupons in a split 2041 maturity, and 4.28% with a 5% coupon in 2044. The bonds are callable at par in 2022.
In the competitive market, JPMorgan won the bid for $103 million of San Diego tax and revenue anticipation notes, rated MIG-1 by Moody’s and SP-1-plus by Standard & Poor’s. The notes yielded 0.17% with a 2.5% coupon.
In the secondary, trades compiled by Markit showed a mix of stronger and weaker munis. Yields on Summit County, Ohio, Port Authority 5.25s of 2024 fell four basis points to 3.25% while San Antonio Electric Gas Systems 5s of 2023 fell three basis points to 2.34%.
Yields on Florida’s Citizens Property Insurance Corp. 5s of 2019 fell two basis points to 3.05% and Fresno County, Calif., pension obligation 0s of 2025 dropped one basis point to 5.18%.
But other trades showed weakening. Yields on New York City Municipal Water Finance Authority 5s of 2043 rose three basis points to 3.62%, while Virginia Small Business Financing Authority 6s of 2037 rose one basis point to 4.76%.
Throughout June, muni-to-Treasury ratios fell as munis outperformed Treasuries and became relatively more expensive. The two-year muni-to-Treasury ratio plummeted to 103.2% on Thursday from 123.1% on June 1. The 10-year ratio fell to 114.7% from 119.9% at the beginning of the month. The 30-year ratio dropped to 116.1% from 120.6% at the start of June.
So far this month, the slope of the yield curve has risen as investors traded in longer-duration bonds for shorter maturities. The one- to 30-year slope of the curve widened to 298 basis points from 284 basis points on June 1. The one- to 10-year curve also widened to 169 basis points from 155 basis points at the beginning of the month.
Credit spreads have widened throughout June as investors moved into higher quality bonds on credit fears. The 10-year triple-A to single-A spread widened to 80 basis points on Thursday from 78 basis points on June 1. The 30-year spread rose to 77 basis points from 75 basis points at the beginning of June. The two-year triple-A to single-A spread held steady at 39 basis points.
In June, muni exchange-traded funds have struggled. The iShares S&P National AMT-Free Municipal Bond ETF — ticker MUB — fell 0.71%. The SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF — ticker SHM — fell 0.28%. The PowerShares Insured National Muni Bond ETF — ticker PZA — dropped 0.59%.
Muni ETFs outperformed the ProShares Ultra Seven to 10 Year Treasury ETF — ticker UST — which plummeted 0.96% for the month so far.
Muni ETFs mostly fell short of corporate bond ETFs. The iShares iBoxx High Yield Corporate Bond ETF — ticker HYG — rose 1.12% and the iShares IBoxx Investment Grade Corporate Bond Fund ETF — ticker LQD — fell only 0.49%.
In the taxable market, MMD analyst Daniel Berger noted the five-year taxable muni has become expensive. The spread between the five-year triple-A taxable muni and five-year triple-A tax-exempt muni has compressed to 127 basis points, versus a 12-month average of 154.5, creating a potential underperformance of 27.5 basis points if the spread widens back out.
“On Jan. 3, the spread between the five-year taxable muni and the five-year triple-A muni was 202 basis points,” Berger said. “Since Jan. 3, five-year taxable munis have been bumped 83 basis points while the positive move for five-year triple-A munis has only been 8 basis points.”