The municipal market added a healthy pink hue to its complexion Monday. Early new issuance found a ready audience in the primary, while traders showed a willingness to move pricing levels for high-grade product in the secondary.
Issuers and underwriters sensed strong appetite during the retail order period for their new bonds.
Retail pricings for new deals in Michigan and New York were well-received.
While trading volume in the secondary ranged from modest to average, the trading itself was dynamic. Participants were willing to step up and pay more for high-quality product, according to a New York trader.
“People get money, whether if still kicking off from July 1 or June 1, and hold it, but then they have to finally put it to work,” he said.
“A lot of ratios are at short-term tights. Then the market doesn’t snap like they think it should. So they have to swallow their pride and put their money to work and make something versus nothing, when it’s sitting in cash.”
Muni yields, following the Treasury market, mostly fell across the curve. They remained steady for maturities through 2013, according to the Municipal Market Data scale.
They were two basis points lower for bonds maturing in 2014. Yields for the rest of the curve fell three to four basis points.
The benchmark 10-year muni yield fell four basis points Monday to 2.70%. It stands 28 basis points beneath its average for 2011.
The 30-year yield lost three basis points, falling to 4.34%, or 28 basis points under its average for the year. The two-year yield ended the week unchanged at 0.42% for the 20th straight session, hovering 18 basis points below its average for 2011.
Treasury yields fell throughout the day, closing lower across the curve. The 10-year yield plunged 10 basis points to 2.92%, settling solidly below 3.00%.
The two-year yield slipped three basis points to 0.37%. The 30-year yield declined eight basis points to 4.21%.
Healthy new issuance will help the market, traders said. Muni bonds to be sold this week are expected to total $5.3 billion, against a revised $878.4 million last week.
After the holiday-shortened week, new issuance should resemble June’s volume levels once again, when more than $5 billion a week in new product was issued.
Issuers see a favorable market, and so are pricing larger new issues earlier than usual.
JPMorgan started the week’s new dealing by pricing for retail $594.5 million of Michigan State Building Authority revenue and refunding bonds. The credits are rated Aa3 by Moody’s Investors Service and A-plus by Standard & Poor’s.
Yields in the first series, for $413.3 million, range from 1.42% at a 5.00% coupon in 2013 to 5.67% with a 5.50% coupon in 2043. There is no retail offered for maturities from 2024 through 2030. Debt maturing in 2011 and 2012 were offered in a sealed bid.
Yields in the second series, for $181.2 million, range from 1.42% with a 2.00% coupon in 2013 to 5.41% with a 5.375% coupon in 2036. Maturities in 2026 and 2036 were wrapped by Assured Guaranty Municipal Corp.
Bonds maturing in 2024, 2025, 2027 and 2028 were not offered during the retail order period. Bonds maturing in 2011 and 2012 will be decided via sealed bid.
Bank of America Merrill Lynch, leading a group of 27 underwriters, priced for retail $390 million of New York Metropolitan Transportation Authority revenue bonds. The debt was rated A2 by Moody’s, A by Standard & Poor’s, and A-plus by Fitch Ratings.
Yields range from 0.73% with a 2.00% coupon in 2012 to 5.16% with a 5.00% coupon in 2036. Debt maturing in 2024 and 2036 are wrapped by Assured. Bonds maturing in 2025 through 2027, as well as in 2029, 2030 and 2041, are not offered for retail.
The demand for new issuance may well meet more supply than has been expected in the coming months.
Industry analysts at Citi, led by George Friedlander, are raising their expectations for new volume.
June’s sharp rebound in supply lies behind Citi’s increase, Friedlander wrote in a recent report. The firm’s most recent estimate of supply for the year of up to $240 billion is too low, according to Citi. The $31.5 billion June saw represented a 53.6% jump from May levels, and nearly doubled the average of $16.7 billion during the first five months of the year.
“That jump, in and of itself, is not the only reason for us to move our estimate back up,” Friedlander wrote. “It simply confirmed our suspicion that, all of the drags on issuance notwithstanding, there are reasons to believe that a $280 billion issuance level is achievable. It should be noted that this is still a drop of roughly 35% from the 2010 level of $433 billion.”
Volume estimates should be up for several reasons, he said. For one, obstacles to new issuance are falling. They include the large group of new governors who needed to get up to speed on their states’ finances before contemplating any new bonds, the poor muni market in the first two months of 2011, and the conclusions to many budgetary battles in state capitals across the country.
In addition, state agency and refunding issuance, though down year to date, was unchanged in June. This has led Friedlander’s team to argue that some of the reasons for both of the declines have subsided.
But some hindrances to issuance linger, Friedlander added.
The reasons underpinning the year’s light issuance in environmental facility, health care, and county and parish bonds are still valid. And the patterns for issuance in some transportation subsectors — such as state highway financings, ports and airports, toll roads, and light rail — are still hard to discern.