Tax-exempts defied muni market participants who said yields were too low to go any lower.
On the last trading session in January, yields on the long end hit new all-time lows as recorded by Municipal Market Data, and yields in the intermediate term came close.
The 15-, 20-, 25- and 30-year muni yields set new lows, breaking records set earlier this month. The 15-year closed at 2.21%, the 20-year finished at 2.70%, the 25-year came in at 3.08% and the 30-year finished at 3.14%.
The 10-year muni closed down two basis points to 1.68%, one basis point higher than its low of 1.67% set on Jan. 18. The two-year was steady at 0.33%, its lowest since Sept. 27.
And some say the party isn’t over yet. “Tomorrow will be the best,” a New York trader said. “Can we keep rallying or is this a line in the sand that we can’t cross? I lean slightly to a continuation of the rally, at least for the next couple of days.”
Munis were quiet Tuesday morning but rallied on new issuance and stronger Treasuries.
“The morning was relatively quiet, as the drift in Treasuries and anticipation over how the Washington deal would do seemed to make dealers and buyers cautious,” the New York trader added.
But by afternoon, munis looked firmer. “We are all the way back to the levels that the market rejected on Jan. 19, with the market looking on as to whether we would actually hold these levels this time up,” he said.
Two Washington deals, a total of $978.6 million of debt, were well-received, the trader said.
“This positive reception, coupled with a reversal in Treasuries, led to a fairly constructive tone to start the afternoon,” he said.
Treasuries reversed midday to end stronger. The benchmark 10-year yield fell five basis points to 1.80% while the 30-year yield dropped six basis points to 2.94%. The two-year yield rose one basis point to 0.23%.
Despite the lows, buyers were interested. Nominal savings from the deal exceeded $15 million, according to Washington state Treasurer James McIntire.
“Washington has successfully executed the country’s largest tax-exempt competitive bond sale since the economic collapse in September 2008,” McIntire said in a statement. “Refinancing our bonds in today’s low-interest environment produced present value savings of more than 14%.”
“Combined with earlier refinancings and our ability to sell bonds at lower than expected interest rates, this brings our total general fund savings in this biennium’s debt service costs to $31 million since the budget was adopted last spring,” he said.
The Washington bonds are rated Aa1 by Moody’s Investors Service, and AA-plus by Standard & Poor’s and Fitch Ratings. Last week, Fitch downgraded the state’s outlook to negative from stable. Moody’s followed on Monday by slashing the outlook on Washington’s outstanding debt to negative from stable.
Bank of America Merrill Lynch won the bid for $715.2 million of various-purpose GO refunding bonds. Yields ranged from 1.37% with a 5% coupon in 2019 to 3.00% priced at par in 2029. Debt maturing between 2015 and 2018, and in 2023, 2024, 2027, and 2028 were sold but not available. The bonds are callable at par in 2022.
Wells Fargo won the bid for $263.4 million of motor vehicle fuel-tax GO refunding bonds. Yields ranged from 0.45% with a 5% coupon in 2014 to 3.15% with a 3% coupon in 2029. Bonds maturing in 2015 and 2016 were not formally re-offered. The debt is callable at par in 2022.
On the negotiated calendar, Goldman, Sachs & Co. repriced $90 million of Dormitory Authority of State of New York Memorial Sloan-Kettering Cancer Center revenue bonds, rated Aa2 by Moody’s, AA-minus by Standard & Poor’s, and AA by Fitch.
Yields ranged from 0.49% with a 3% coupon in 2014 to 3.80% with a 5% coupon in 2041. The bonds are callable at par in 2022. From preliminary pricing, yields were selectively lowered between four and 10 basis points across the curve.
JPMorgan priced for retail investors $234.5 million of Nebraska Public Power District general revenue bonds. The credit is rated A1 by Moody’s, A by Standard & Poor’s and A-plus by Fitch. Pricing information was not available by press time.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming.
Bonds from an interdealer trade of Georgia 5s of 2023 yielded 1.84%, six basis points lower than where they traded Monday.
Bonds from an interdealer trade of Opelika, Ala., 4s of 2032 yielded 3.75%, five basis points lower than where they traded Monday.
Bonds from another interdealer trade of Metropolitan Government of Nashville and Davidson County 5s of 2036 yielded 3.25%, four basis points lower than where they traded Monday.
Bonds from an interdealer trade of Delaware Health Facilities Authority 5s of 2044 yielded 4.52%, three basis points lower than where they traded Monday.
Throughout January, muni-to-Treasury ratios have fallen as munis outperformed Treasuries and became more expensive. The 10-year ratio fell to 93.3% on Tuesday from 96.4% at the beginning of the month. The 30-year ratio fell to 106.8% from 119.4%.
The five-year ratio was the exception as ratios rose to 100% from 98.9% at the beginning of the year.
The slope of the yield curve has also declined dramatically this month. On Tuesday, the 10- to 30-year slope fell to 146 basis points, down from 169 basis points at the beginning of January.