A pronounced sell-off in Treasuries failed to stop munis from holding steady or grinding higher Wednesday, allowing tax-exempts to outperform yet again.
“It’s not uncommon, but it’s difficult to analyze,” a trader in New York said of the muni-Treasury dynamic. “We ran a similar pattern last week, when Treasuries were off but we weren’t.”
He described activity as pretty quiet, noting that all the strength was in highly rated, well-known credits.
“Guys are not afraid to pay up today,” a trader in Florida added. “We’re still in a mode where demand will outpace supply, despite what Treasuries are doing, and we’re going to keep with that premise today.”
The Florida trader said the ongoing rally — now in its 27th day, save for a few days of pause — has forced muni strategists to revise their thought processes to accommodate lower yields.
Demand for tax-exempts in the two- to six-year range was robust, but all other maturities were flat. The five-year muni yield was chopped three basis points to 1.19%, its lowest since Nov. 12, 2010. That pushed the five-year muni-Treasury ratio to 64.67%, a 14-month low.
“Investors continue to search for yield and look to capture short maturity high grade blocks for downside protection,” Domenic Vonella wrote in Municipal Market Data’s daily column.
The benchmark 10-year muni remained at 2.59%, its lowest since Nov. 9, 2010, and 68 basis points down from a recent peak on April 11.
With the 10-year Treasury yield backing up six basis points to 3.17%, the 10-year muni-Treasury ratio fell to a fresh 12-month low of 81.70%.
The 30-year muni yield held at 4.31%, its lowest since Dec. 1, 2010. Its muni-Treasury ratio now hovers just above 100%, versus a 2011 average of 105%.
Treasuries were actually strong at the open: the 10-year yield fell as low as 3.094% in early trading. But they backed up by the hour and finished weaker throughout the curve.
“It’s two separate worlds,” a trader in New Jersey said, describing tax-exempts as unfazed. “There’s not enough in the muni world for Treasuries to have any effect, unfortunately.”
He noted earlier deals this week, including the Connecticut general obligation issue, were absorbed easily and there’s no reason to think anything will change soon with supply down roughly 50% from last year.
“There is certainly retail appetite out there, if you can find it,” he added.
Firm new-issue pricing was demonstrated by Morgan Keegan & Co.’s $82 million special project revenue deal for the San Jacinto River Authority in Texas. It slashed 2034 bond yields down seven basis points in a repricing to 5.27%, while shorter maturities were unchanged.
The bonds were rated AA by Standard & Poor’s and included a wrap from Assured Guaranty Municipal Corp.
The largest issue to hit Wednesday’s market was a four-pronged, $310.6 million GO deal for Oregon. Underwritten by Citi, the deal was rated double-A plus by all three rating agencies. Yields in the preliminary pricing ranged from 0.30% in 2012 to 4.58% in 2036.
Barclays Capital priced $180 million of consolidated system revenue bonds for Chelan County, Wash., Public Utility District No. 1. The refunding bonds were rated Aa2 by Moody’s Investors Service, AA by Standard & Poor’s, and AA-plus by Fitch Ratings.
The deal was priced in two series, each subject to the alternative minimum tax. Yields on each range from 1.16% in 2013 to 4.56% in 2026.
JPMorgan sold $72 million of revenue bonds for the Virginia Resources Authority. A gilt-edged portion of infrastructure revenue bonds offered yields from 0.25% in November 2011 to 4.58% in 2041. A double-A portion of moral obligation bonds offers yields from 0.35% in 2011 to 4.72% in 2041.
Reviewing the last five weeks, market strategist Anthony Valleri from LPL Financial noted: “Buyers awaiting an increase in new issuance to create market weakness and thus a buying opportunity have thrown in the towel and begun to put money to work.”
He said recent buying demand hasn’t been ravenous, “but it has proven more than sufficient for the existing level of new issuance.”
However, arguing that falling yields are likely to entice borrowers to come to market, Valleri titled his research “Curb Your Municipal Enthusiasm,” and argued that supply could soon increase and create a breather for the rally. But while The Bond Buyer’s 30-day visible supply has been on the rise in recent weeks, it was slashed by $1.07 billion Tuesday to $6.122 billion.
Natalie Cohen, senior analyst at Wells Fargo Securities, pointed out last Friday that the rally could be receiving support from the steady growth of separately managed accounts, or SMAs. According to a Cerulli Associates report cited by Cohen, total assets in SMAs were estimated at $2.6 trillion as of 2010, compared with just $470 billion in 2003. While munis made up just 9.1% of SMA assets in 2007, that allocation had jumped to 20.5% by mid-2010 — the latest data available.
“Our field discussions confirm that this trend had deepened through Q1-Q2 as mutual fund holders sold,” Cohen added.
While tax-exempts maintained strength Wednesday, Build America Bonds sold off alongside Treasuries.
A $33 million BAB fund actively managed by Pacific Investment Management Co. fell 0.68% Wednesday to $49.50. However, it is up 1.25% over the last week, 3.52% over the past month, and 5.15% year-to-date.
The same trend was evident in Nuveen Investments’ BABs index, a $36 million exchange-traded fund that tracks a passive portfolio managed by Barclays Capital. It fell 0.93% to $50.97 Wednesday, but it remains up 0.65% over the past week, 4.34% over the past month, and 6.66% year-to-date.
Citi analysts noted on April 25 that BABs were a top-performing asset class in the first-quarter and said they continue to look attractive from a spread-over-corporates perspective.
“Despite their stellar performance in 1Q 2011, we think that there is still a lot of juice in taxable muni spreads,” they wrote. “BABs are still wide compared to the long-dated, lower-rated industrials, despite trading through them just a year ago.”