The municipal bond rally that began April 11 continued Tuesday as some of the biggest deals in another relatively light week were easily absorbed in the primary market.
“High-grades traded well, there was light activity, and new-issue pricing was firm,” a New York trader said.
All maturities beyond 2013 saw yields fall two basis points, according to the Municipal Market Data’s triple-A scale. Benchmark muni yields have now been stable or firming for 16 trading days, leaving municipal prices at their highest since December.
MMD’s Domenic Vonella said the ongoing rally is being driven by a scarcity bid for high-grade bonds and credit spread-tightening for strong revenue and essential credits.
“Preference for high-grade liquid names is picking up,” Vonella wrote in a daily commentary.
“As the market reaches potential volatility, it should not be surprising to see preference for liquidity available in AAA state and local credits.”
In what was supposed to be a two-day sale, JPMorgan brought to market $600 million of New Jersey Transportation Trust Fund Authority bonds to retail investors. Orders were filled so quickly that Wednesday’s institutional pricing was accelerated into Tuesday and the entire deal was sold in a single day.
Yields in the institutional period ranged from 1.51% in 2013 to 5.47% in 2041. Compared with the retail period, yields were slashed across the curve by five to 13 basis points.
The deal was rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s, and AA-minus by Fitch Ratings. Traders said it was easily digested because of little competition in the primary.
“It was received well because it’s the only thing out there,” the first New York trader said, adding that growing appetite for lower-grade issues has been evident for the past two weeks. “They got oversold, so their relative value to high-grades is coming back now.”
“We had huge demand,” said New Jersey Treasury Department spokesman Andrew Pratt. “We were able to get much better yields than we anticipated from investors and ... because we had such a high demand during retail pricing, we went back to re-price and the institutional investors stepped in on the same day to complete the sale.”
After a one-day retail pricing Monday, Bank of America Merrill Lynch was able to slash yields on its $172.3 million issue for the Oregon State Board of Higher Education. The general obligation bonds were priced in three series, offering yields from 0.66% in 2012 to 4.80% in 2041.
Yields in the second series saw longer-term yields cut up to five basis points from the retail period, while short-term yields were priced two basis points lower.
The deal was rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch.
Vonella noted a lack of gilt-edged GO credits was helping to create a rally for “the next best” credit.
“Into the afternoon institutional investors stepped up for slightly lower tiered credits in higher education and income tax sectors ... driving quality spreads tighter,” Vonella wrote.
MMD’s benchmark 10-year yield finished Tuesday at 2.83%, 44 basis points lower than a recent peak of 3.27% on
The two-year yield fell two basis points to 0.54%, it lowest since November 15, and the 30-year offered 4.56%, its lowest since December 7.
A rival scale from Municipal Market Advisors said 10-year gilt-edged munis fell two basis points to 3.08% Tuesday, marking a 26 basis point drop from April 11.
Two main factors are driving muni prices higher: issuance is expected at less than $3.5 billion this week, versus an $8 billion weekly average in 2010; and Treasuries are volatile but firming.
The benchmark 10-year Treasury yield fell two basis points Tuesday to 3.26%, after meeting resistance several times just under the 3.25% mark. Its lowest yield in 2011 was 3.17% on March 16.
The two-year Treasury note remained at 0.61% , while the 30-year yield fell three basis points to 4.36%, its lowest since January 5.
Traders said the firming helps municipal pricing, but the biggest factor driving prices higher continues to be dismal supply.
“Supply is everything,” a New Jersey trader said. “Until we see some major supply in the market here, people are willing to sit on their hands for a bit. Bond funds have no reason to sell right now. If there is still an outflow from funds, it’s slowing.”
One problem with light supply is knowing whether current rates are the “true” ones. The New York trader said a batch of new supply would help traders be more comfortable with where rates are currently at.
“A lot of these guys just don’t know what to do,” he said. “More supply would help the market. Price discovery is really important for us.”
New economic data was slight but sweet. Factory orders jumped 3% in March, beating the Street’s median forecast by more than a percentage point and marking the fifth straight monthly gain.
The core index — a measure of non-military capital goods excluding aircraft — ticked up 4.1% in March, the best reading since August. Revised data also showed that orders in February climbed 0.7%, versus an initial estimate that orders fell 0.1%.
But the stock market’s reaction to the report was muted, as much of the gains were due to higher gasoline prices and a lower U.S. dollar.
“The solid gain in overall orders should be viewed with caution because of price effects,” said economists at Nomura Global Economics. “Orders for goods excluding petroleum and coal products rose by only 1.7% month-over-month compared with the 3.0% increase in orders for overall products.”