Tax-exempt yields strengthened alongside Treasuries at Thursday’s open, but then stalled in afternoon trading and eventually returned to Wednesday’s levels as Treasury rates swung back.
“A tricky market today,” a trader in New York said. “We started strong, weakened early, though, and then came back a little, but not in full.”
“The market was better out the gate but trading has been silent recently,” a trader in Chicago said at midday. “Rates are low and new issuance this week is big, but there is tons of dough to pick it up.”
Municipal Market Data’s triple-A curve was steady all the way through, though at midday certain maturities saw yields drop two basis points.
A volatile Treasury market played a key role in tax-exempt dynamics. The benchmark 10-year Treasury yield fell as low as 2.919% in early trading — a calendar-year low — but it swung back to finish at 3%, five basis points higher than on Wednesday. For the week, however, its yield fell three basis points.
The two-year muni yield has remained at a calendar-year low of 0.44% since May 18. The 10-year yield is now at 2.61%, the same as the previous Thursday and two basis points higher than its calendar-year low. The 30-year yield fell one basis point from the previous Thursday to 4.25%, its lowest since mid-November.
The iShares $2.1 billion National Municipal Bond Fund exchange-traded fund was up 0.11% in early trading, but then tumbled and finished 0.06% lower at $103.69. Traders said Thursday’s action was all in the primary market, where deals were digested with ease, whereas secondary trading was subdued.
“Guys like new stuff so it’s being gobbled up,” the Chicago trader said. “But I can’t imagine much activity in the secondary for the next couple of weeks. It’s pretty thin. There’s just not much to choose from there, so it’s a new-issue market.”
“People like things that are clean, fresh,” the New York trader added. “Buyers don’t get questioned if they buy at new-issue levels. They might though, if they step out themselves and buy, say, Oregon bonds. It’s a matter of safety.”
In the negotiated market, Barclays Capital cut yields as it offered to institutional investors $313.8 million of hospital facility revenue bonds for Franklin, Ohio. The bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
Yields ranged from 1.03% in 2013 — 10 basis points lower than in Wednesday’s retail period — to 5.09% in 2041, or four basis points down from Wednesday.
Bank of America Merrill Lynch sold $426.4 million of first-lien revenue bonds for Houston. Rated double-A by Moody’s and Standard & Poor’s, the deal offered yields from 1.63% in 2016 to 4.80% in 2040.
Goldman, Sachs & Co. sold $336.6 million of taxable revenue bonds for the South Carolina Public Service Authority. Rated Aa3 by Moody’s and AA by Fitch, the bonds mature in 2013 and 2014. Yields are linked to the one-month Libor rate, offering 50 and 70 basis point spreads. Also on the negotiated calendar were $79.39 million of Sacramento City Unified School District refunding GOs sold by Morgan Stanley. Rated Aa3 by Moody’s and AA by Fitch, yields ranged from 0.77% in 2013 to 4.42% in 2029.
New supply in Muniland this week was estimated Monday at $6.3 billion — the largest this year — versus a weekly average of $3.9 billion.
“Supply is there, finally,” said Geoff Urbina, managing director at KeyBanc Capital Markets in Seattle. “And it’s at the right time, too — we have the demand from the rollover giving a firming effect.”
Municipal Market Advisors estimated in May that $50 billion and $27 billion of munis would mature in June and July, respectively, not including coupon reinvestment.
“The June-July rollover period is certainly helping prices,” Urbina said. “But there’s a lot of rollover just sitting on the sidelines, and we’re also getting into the summer doldrums a little bit. As we progress further and as money managers put this money to work, it will be interesting to see how the market reacts.”
Ken Friedrich, manager of municipal sales, trading, and syndication at RBC Capital Markets, said people are viewing this as “a pivotal week in the marketplace” due to the high volume, even if 2010 issuance averaged $8 billion.
“On the retail side, we have definitely struggled as these rates have continued to go lower — no question about it,” Friedrich said. “Part of what’s picked up the slack has been institutional investors, including SMA-accounts, that have been in a cash-positive position. … There’s been enough issuance this week, but clearly there was a big overhang of cash.”
Many have noted that retail buyers are balking at low nominal yields, although relative to Treasuries munis remain attractive by historical standards. The 30-year muni currently offers 100% of its Treasury equivalent, versus a long-term average of 91%. In April it was as high as 107%.
Friedrich said the market tone is neutral but there is room to climb if muni mutual funds finally reverse course. Indeed, just before going to press Lipper FMI posted the first net weekly inflow in 30 weeks.
Additionally, the market could get a boost if there’s more legislative talk of tax-reform measures that could cut tax-exempt supply down the road. “People already have in the back of their minds that taxes are likely to be higher in two years,” Friedrich said, “and it can add to the positive tone on the margin.”