The tax-exempt market was calm before the storm. On Monday, traders were patiently waiting for the year’s largest slate of new issuance to start pricing this week.
“It’s a quiet Monday,” a New York trader said, adding that he is looking at a few deals on the calendar later this week but is not participating in anything just yet.
Other traders agreed. “Munis are pretty quiet ahead of the week’s deals,” a Florida trader said. “We started to see price stabilization on Friday. Buyers who didn’t get what they wanted stepped in a little on Friday. But munis are quiet this morning and most of the reaction we see from customers is they want to see how deals are priced and see structuring of coupons — and from that point, it’s a wait-and-see attitude.”
The structure of the coupon depends on the large mix of buyers, he said. “Insurance companies still want 4s called inside 10 years. A handful won’t take anything smaller than a 5% coupon, but small separate managed accounts will take inside 3% coupons with a call of 10 years.”
Last week, deals were done and bumped on Tuesday and Wednesday, he said. Deals struggled to get done on Wednesday and Thursday and underwriters went back to the variety of accounts to try to satisfy everyone. “We could see more of that this week,” the trader said.
Munis were weaker, according to the Municipal Market Data scale. Yields inside five years were steady while yields on the six- to 15-year jumped up to three basis points. Outside 16 years, yields rose up to two basis points.
On Monday, the two-year yield ended flat at 0.26%, its record low first registered by MMD on Feb. 16. The 10-year yield jumped up three basis points to 1.94% while the 30-year yield rose one basis point to 3.28%.
Treasuries were weaker across the curve. The two-year yield jumped two basis points to 0.30%. The benchmark 10-year yield and the 30-year yield rose one basis point each to 2.00% and 3.13%, respectively.
In the primary market Monday, M.R. Beal & Co. priced for retail $502.2 million of New York City Municipal Water Finance Authority water and sewer system second general resolution revenue bonds. The credit is rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings. Pricing information was not yet available.
JPMorgan priced for retail $212.6 million of Columbus, Ohio, general obligation bonds, rated triple-A by all three rating agencies. Pricing was not available.
Bank of America Merrill Lynch held its second day of retail on $150 million of Maryland GOs, rated triple-A by the three rating agencies. Institutional pricing is expected Tuesday. Pricing details were not available.
Bank of America Merrill also priced for retail $112 million of Broward County, Fla., bonds, rated triple-A by Moody’s and Fitch and AA-plus by Standard & Poor’s. Pricing was not immediately available.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening.
Bonds from an interdealer trade of University of Texas 5s of 2023 yielded 2.33%, 12 basis points higher than where they traded a week before.
Bonds from an interdealer trade of Puerto Rico Aqueduct and Sewer Authority 5.25s of 2042 yielded 5.29%, four basis points higher than where traded the week before.
Bonds from an interdealer trade of Illinois 6.9s of 2035 yielded 5.86%, one basis point higher than where they traded last week.
A dealer bought from a customer Puerto Rico Aqueduct and Sewer Authority 5.75s of 2037 at 4.98%, one basis point higher than where they traded last week.
Now that March is here, coupled with the uptick in supply this week and last, many investors expect munis to weaken.
“March marks a traditionally difficult seasonal period for the municipal bond market, and performance has historically been challenging,” wrote Anthony Valeri, market strategist at LPL Financial.
One of the biggest issues munis will face in the coming months is tax season.
“Municipal bonds are sold in advance of the April 15 tax deadline as municipal investors raise cash to pay taxes,” Valeri wrote, adding that capital-gains-related selling could be modest this year, but has historically led to the sell-off of munis in March and April.
The intermediate part of the curve is generally hit the hardest, according to Chris Mauro, head of municipals strategy at RBC Capital Markets. “Since retail investors tend to participate more in the intermediate part of the municipal curve, the impact of tax time has been much more pronounced in 10-year bonds than in 30 years,” Mauro said. “However, the timing and length of the tax season effect is almost identical in both the 10-year and 30-year triple-A.”
Historically, there has also been an increase in Treasury issuance in March and April, which will also be a headwind for munis. While it does not directly affect munis, they tend to be correlated to the Treasury market.
“The Treasury Department’s fiscal year begins on Nov. 1, and the second quarter of any given fiscal year is typically accompanied by a seasonal increase in Treasury issuance,” Valeri wrote. “The increase in Treasury supply can have ramifications for the broader bond market, since Treasuries are the backbone of the bond market and price declines can ripple across bond market sectors.”
While near-term weakness in munis can be expected, munis are still attractive relative to Treasuries. Over the past 10 years, the 10-year and 30-year triple-A rated muni has averaged 93% and 100% of comparable Treasuries, respectively.
As of last Friday, both ratios were higher than the averages. The 10-year muni-to-Treasury ratio ended at 96.5% on Friday while the 30-year closed at 105.1%.