The tone in the tax-exempt market was positive Thursday as prices were bumped on deals in the primary and buyers became more comfortable reentering the market at higher yields.
The biggest deal of the week, $935.8 million of California State Public Works Board lease revenue bonds, was priced for institutions by Goldman, Sachs & Co. The bonds are rated A2 by Moody’s Investors Service and BBB-plus by Standard & Poor’s and Fitch Ratings.
The institutional pricing followed a retail order period Wednesday. Retail investors ordered $238.8 million of bonds, or 25.4%, according to a spokesman for California Treasurer Bill Lockyer.
In institutional pricing, yields ranged from 1.06% with 2%, 3%, and 4% coupons in a split 2014 maturity to 4.90% with a 5% coupon in 2037. Yields were lowered up to 17 basis points across the curve from retail pricing. The bonds are callable at par in 2022.
Lockyer said strong market reception pushed down yields across all maturities, with the strongest interest in the 10-year spot that allowed the underwriter to lower yields 17 basis points to 3.66% from 3.83%.
“Given the market uncertainties we faced entering the sale, the results are very gratifying,” Lockyer said. “We’re extremely pleased the final outcome gives the state a better deal.”
The tone improved for munis outside the primary deals. “Overall, sentiment for risky assets today has turned a little sour, due largely to disappointing economic data out of Europe,” said Otis Casey, director of credit research at Markit. “We saw the 10-year yields for Italy and Spain bleed a little higher, which prompted some concerns. That helped buy the bid for Treasuries and, to a lesser extent, munis.”
Despite the increased appetite for safety, the muni and Treasury rally today is “not a full-fledged flight-to-quality move,” he said.
“I am trying to see a silver lining in the cloud,” an Atlanta trader said. “A lot of deals yesterday got repriced on the upside and it’s the first time we’ve seen that in a while.”
Nonetheless, “there is still residue to get through and balances to get through,” the trader said. “But we did see for the first time in awhile where subscription levels were big enough to warrant bumps Wednesday.”
Munis were stronger Thursday for the second consecutive day, according to the Municipal Market Data scale. Yields inside five years were steady while the six-year yield fell one basis point. The seven-year yield dropped three basis points while the eight- to 16-year yields plummeted four to six basis points. Outside 17 years, yields fell two and three basis points.
On Thursday, the two-year yield finished steady at 0.36%. The 10-year yield fell six basis points to 2.25% while the 30-year yield fell three basis points to 3.42%.
Treasuries were slightly stronger for the second consecutive day. The benchmark 10-year yield fell two basis points to 2.28% while the 30-year yield fell one basis point to 3.37%. The two-year was steady at 0.38%.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed strengthening over the past few days and months.
A customer bought from a dealer Puerto Rico 4.25s of 2027 at 4.25%, 25 basis points lower than where they traded in mid-March.
Another customer bought from a dealer Akron, Ohio, 6.463s of 2033 at 3.77%, 23 basis points lower than where they traded in February.
A customer bought from a dealer Illinois 3.321s of 2013 at 0.80%, 10 basis points lower than where they traded Tuesday.
A customer sold to a dealer New York’s Triborough Bridge and Tunnel Authority 5s of 2021 at 2.41%, nine basis points lower than where they traded Wednesday.
In bond insurance news, Moody’s announced earlier this week that it put Assured Guaranty Corp., Assured Guaranty Municipal Corp. and all affiliated insurance operating companies on review for downgrade.
Moody’s also announced that its ratings on bonds wrapped by the firms are being placed on review for possible downgrade, except those with equal or higher published underlying ratings.
Shares subsequently fell over 13% and closed Thursday at $16.29.
According to data compiled by Markit, one CUSIP of Assured Guaranty Municipal Holdings Corp. bonds had an ask price of 71.5 on Thursday, down from 74.25 before the threat of downgrade was announced. The bid price also fell to 69.5 from 72.5.
After the large sell-off last week, some municipal analysts expect yields to rise at a much slower pace.
“We believe that municipal bond rates could rise further, but given the much-overbought condition in the Treasury market, the rise in tax-free bond rates should be much more muted than Treasuries,” wrote John Mousseau, managing director and portfolio manager at Cumberland Advisors.
Muni-to-Treasury ratios have come down on the long end since last October’s 150% ratio, Mousseau added.
“Using more normal ratios — such as the 85% to 95% present before the financial crisis — one would conclude that municipal bonds still offer large amounts of relative value, so yields should rise more slowly,” he said.
In terms of the credit curve, Mousseau is moving towards the shorter end.
“We continue to ratchet down durations in accounts from the levels of last year,” he said. “As supply picks up, there should be opportunities available in the new-issue market that have not been present since early fall of last year.”