The tax-exempt market had a small rally Tuesday after losing ground the previous three trading sessions. Deals were priced aggressively and some institutional bond prices were bumped from Monday’s retail session.
“There was a little rally today,” a New York trader said, while adding that activity was still slow. And despite the recent losses in munis, deals were priced “aggressively.”
While overall activity was slower than usual, volume did pick up in the afternoon as dealers waited for new issues to be priced. “There is a little bit more action out there today with the market stabilizing after the past three trading sessions,” another New York trader said.
In the early afternoon, the trader said the New York City Municipal Water Financing Authority deal had been received well so far.
“Clearly demand is still out there,” he said. “People seem to be gravitating toward the 4% coupon to avoid extremely high premiums.”
Munis were mixed throughout the day with the yield curve flattening, according to the Municipal Market Data scale. But by the close on Tuesday, munis were flat to slightly firmer. Yields inside 26 years were steady, while yields outside the 27-year spot fell one basis point.
On Tuesday, the two-year yield closed steady at 0.35% for its eighth consecutive trading session while the 10-year muni yield finished flat at 1.87%. The 30-year yield fell one basis point to 3.36%.
Treasuries were a little firmer as the benchmark 10-year yield and the 30-year yield each fell one basis point to 2.06% and 3.15%, respectively. The two-year yield finished flat at 0.25% for its fourth consecutive trading session.
In the primary market, Ramirez & Co. priced for institutions $400 million of New York City water and sewer system second-general resolution revenue bonds following the retail order period Monday. The bonds are rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.
Bonds in the first series, $350 million of 2045 terms bonds, yielded 3.94% with a 5% coupon. They are callable at par in 2021. Bonds in the first series were not offered for retail Monday.
Bonds in the second series of $50 million yielded 1.22% with 3% and 4% coupons in 2018 and 2.80% with a 5% coupon in 2027. Debt maturing in 2018 is callable at par in 2016 and debt maturing in 2027 is callable at par in 2021. Yields on credits maturing in 2018 were cut three basis points from retail pricing.
Goldman, Sachs & Co. priced $344.8 million of Florida’s JEA water and sewer system revenue bonds. The debt is rated Aa2 by Moody’s and AA by Standard & Poor’s and Fitch.
Yields on the first series of $320.3 million ranged from 0.42% with a 4% coupon in 2013 to 4.35% with a 4.25% coupon in 2041. The bonds are callable at par in 2021, except for credits maturing between 2025 and 2027 that are callable at par in 2017.
Yields on the second series of $24.5 million ranged from 2.66% with a 3% coupon in 2021 to 4.13% with a 4% coupon in 2033. The bonds are callable at par in 2017.
Also on Tuesday, Goldman priced $190.5 million of University of Chicago taxable fixed-rate bonds, rated Aa1 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch.
The bonds mature in 2024 and 2042 and are priced at par to yield 3.065% and 4.683%, respectively. The bonds are priced to yield 100 basis points and 155 basis points above the comparable Treasuries.
In the competitive market, triple-A rated Wake County, N.C., auctioned $172.1 million of general obligation bonds in two pricings.
Bank of America Merrill Lynch won the bid for the $96.8 million deal. Yields ranged from 1.50% with a 5% coupon in 2019 to 3.16% with a 3% coupon in 2031. Bonds maturing between 2013 and 2019 and between 2023 and 2029 were sold but not available. Debt maturing between 2013 and 2022 are not callable. Credits maturing between 2023 and 2031 are callable at par in 2022.
JPMorgan won the $75.3 million deal. The bonds yielded 1.04% with a 5% coupon in 2018, 1.28% with a 5% coupon in 2019, 1.49% with a 5% coupon in 2020, and 1.69% with a 5% coupon in 2021.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming, especially around the 10-year spot.
A dealer sold to a customer California 5.5s of 2026 at 2.64%, 36 basis points lower than where they traded Monday.
Another dealer sold to a customer Johnson County, Kan., University School District 4.55s of 2025 at 3.00%, 18 basis points lower than where they traded Monday.
Bonds from an interdealer trade of Colorado Health Facilities Authority 5s of 2023 yielded 3.01%, three basis points lower than where they traded Monday.
Since munis began a three-day losing streak last Thursday, ratios have risen as munis have underperformed Treasuries. The 10-year muni-to-Treasury ratio rose to 90.8% on Monday from 88.4% last Wednesday. The 30-year ratio rose to 107.3% from 106.8% for the same time period. The five-year ratio is the exception, closing down at 91.2% on Monday from 96.2% last Wednesday.
John Hallacy, municipal research strategist at B of A Merrill, said underwriters have been experimenting with coupon structures on new issues to try to get the optimal price. Of all outstanding municipal bonds, $1.9 trillion have 5% or higher coupons. Bonds with coupons between 3% and 4.99% make up a small $0.7 trillion slice of the market.
Bonds with coupons under 3% make up $1.1 trillion — and include coupons on floating-rate products.
“As interest rates ascend once again in the future, the expectation is that this category will grow once again,” Hallacy said. “Five percent or higher coupons continue to comprise the greatest representation among coupons outstanding.”