Municipal bonds suffered for a second straight session as Treasuries continued to offer high yields Wednesday.
Investors were more interested in risky assets after the Greek Parliament accepted a five-year austerity plan to qualify for bailout money aimed to save the European state from a potential default.
Tax-exempts maturing between 2016 and 2018 saw yields jump five basis points, while longer-term yields rose three basis points, according to Municipal Market Data. Shorter-term bonds were flat or just modestly weaker.
“Anemic yields in the triple-A market have driven bid-ask spreads wider and the clearing level for high grade names are noticeably wider,” MMD analyst Domenic Vonella wrote in a daily note. “High-grade secondary market activity was limited as a result.
The two-year, 10-year, and 30-year yields closed the day at 0.42.%, 2.70% and 4.30%, respectively.
As with Monday and Tuesday, the muni dip was mild next to the broader sell-off in Treasuries. There, the 10-year yield rushed up nine basis points to 3.13% and the 30-year yield rose seven basis points to 4.39%.
The outperformance of munis lowered the 10-year muni-Treasury ratio to 86.5% Wednesday, down from 92% last Friday.
But the muni sell-off wasn’t only a consequence of forces outside Muni Land.
A trader in New York said some muni buyers are taking profits now because Thursday marks the end of the second quarter, so they either lighten up on holdings or book profits rather than risk taking a loss.
Other weakness stems from residual balances left over from deals sold in the past 10 days, particularly from competitive offers like the $920 million Georgia deal that was split between Citi and Bank of America Merrill Lynch.
“The piece that Citi took down — they were pretty aggressive on their levels when they stepped up for the earlier pricing,” the trader said. “Then B of A came in — their pricing was cheaper but it had lower coupons. So I think people are just sitting on the sidelines overall. It’s not just munis. Traders are waiting to see what’s going to happen with Greece. And you still have the whole thing with the debt ceiling in the States.”
It was predicted the June reinvestment period would strengthen munis, but with the market stubbornly flat all month and then selling off this week, the direction of that cash flow is being questioned.
“There is still an awful lot of paper flowing around,” the trader said, noting that rollover money was supposed to absorb any excess. “You still had outflows among mutual funds in June. So while there have been coupon payments, people are asking if it is leaving the market.”
The new-issue market didn’t have much problem absorbing new names. The Citizens Property Insurance Corp. in Florida priced $900 million of coastal account senior secured bonds through Citi.
Rated A2 by Moody’s Investors Service and A-plus by Standard & Poor’s and Fitch Ratings, the complex deal includes short-term notes, serial bonds, and SIFMA floating-rate notes.
The notes, for $105 million, mature in June 2012 and were sold with a 0.65% yield on a 2% coupon.
The serial bonds mature between 2015 and 2020, with yields ranging from 3.08% to 4.75%.
Assured Guaranty Municipal wrapped a portion of debt for each year; the credit-enhanced yields ranged from 2.83% to 4.50%.
Finally, $150 million of floating-rates notes — all wrapped by Assured — mature in 2011 and offer 165 basis points above the SIFMA rate.
A pricing wire for Puerto Rico’s first new-money general obligation debt offering in nearly three years hit the wires early morning, but a source at underwriter JPMorgan said the entire deal was sold Tuesday.
The debt was scheduled to be sold over two days, but appetite for the $305 million deal was so robust that the territory moved the institutional pricing forward and even added $298 million of refunding debt to the deal. That too cleared Tuesday, as the deal received more than $1 billion of orders.
“We saw that we had a strong retail-order book,” said Jose Otero-Freiria, executive vice president for finance at the Government Development Bank for Puerto Rico. “We also were anticipating potentially some volatility in the markets due to a vote on the austerity plan in Greece, so we decided that we would have institutional pricing on Tuesday.”
The sale shows investors are ready and willing to step down the credit curve when a good deal presents itself. The territory is rated A3 by Moody’s, BBB by Standard & Poor’s and BBB-plus by Fitch.
One major benefit is that Puerto Rico bonds offer a triple-whammy tax-exemption at the city, state, and federal level for investors across the United States.
The yield on the new-money public improvement bonds maturing in 2041 was 5.95% — a spread of 127 basis points versus Tuesday’s triple-A scale.
The entire deal was sold to institutional investors, according to Otero-Freiria.
The two-pronged refunding debt portion was offered to a mix of retail and institutional buyers with yields ranging from 1.80% in 2013 to 5.83% in 2034. The 2013 yield compares with a 0.42% yield on the triple-A scale.
Assured wrapped parts of the refunding debt maturing in 2019 and 2020. Insured yields were 3.875% in 2019, versus a naked yield of 4.25%, and 4.125% in 2020, versus a naked yield of 4.50%.
Otero-Freiria said the $52 million refunding piece generated present-value savings of more than 6%.
The second refunding piece refinanced variable-rate debt into fixed-rate debt to help the commonwealth reduce rollover risk on liquidity facilities.