The municipal market weakened a little Thursday, as it watched an afternoon sell-off in Treasuries and a strong day for the stock markets.
In the midst of the drama, retail investors made a cameo appearance and took bites out of some intermediate- and longer-term maturities in the muni secondary market.
“We saw retail come back into the market today,” a trader in New York said. “I don’t think retail is back full swing; yields aren’t there yet. But they’re certainly not as nervous as they were on Monday and Tuesday.”
Munis are performing in horrible weather, the trader added. Exceptionally light issuance, enormous market swings, the summer season, Europe on holiday — all should make for a muni market in the doldrums. Yet yields and ratios still support a strong market.
Thursday’s Treasury auction consisted of “doom and gloom” pricing, the trader added. But recent data points in another direction, he added.
“Everyone was pricing for a terrifying 2008 and 2009 all over again, and it really is not the case,” he said. “While we’re not nearly where we’d like to be, the economy is improving slightly every day.”
Tax-exempt yields weakened in the intermediate and long ends of the curve as the day progressed, according to Municipal Market Data. They were unchanged up through 10 years.
Yields between 2022 and 2032 increased by one to two basis points. Munis maturing after 2032 rose four basis points.
Thursday’s session ended with softening on the long end of the yield curve. The 10-year muni yield held steady at 2.26%, its lowest yield since Sept. 3. The two-year muni yield remained unchanged at 0.30%, its lowest yield in more than two years.
The 30-year muni yield, though, jumped four basis points to 3.88%, still its lowest level since Nov. 2.
Treasuries weakened considerably on the intermediate and long end. The benchmark 10-year Treasury yield, after a 19- basis-point plunge Wednesday, jumped 26 basis points to 2.34%. The 30-year yield rocketed a blistering 31 basis points to 3.79%.
The two-year yield, though, held at one basis point above its all-time low at 0.19%.
From July 25 to Thursday, muni ratios to Treasuries have only gotten more attractive for investors who can stomach the incredibly low nominal yields. Over the period, they have jumped from 97.6% of Treasuries to 157.9% for two-year yields, 89.3% to 96.6% for 10-year yields, and 100.7% to 102.4% for 30-year yields.
In fact, muni ratios to Treasuries are higher along most of the curve compared to their averages for 2011, even though they dropped from their highs on Aug. 9, according to MMD numbers. The calendar year averages for muni ratios to Treasuries stand at 101.7% for two-year yields, 90.8% for 10-year yields and 103.8% for 30-year yields.
The market has gotten little help from the primary, as supply has been virtually non-existent all week. Muni market participants note that this has played a prominent role in plunging muni yields. This week, the industry predicts that municipal bonds sold will total $2.25 billion against a revised $3.24 billion last week.
Some Texas-based deals set the pace among new deals on the negotiated side. JPMorgan priced $168.3 million of Fort Worth water and sewer system revenue refunding and improvement bonds for four counties. The bonds are rated Aa1 by Moody’s Investors Service, AA by Standard & Poor’s, and AA-plus by Fitch Ratings.
Yields range from 0.28% with a 3.00% coupon in 2013 to 3.81% with a 5.00% coupon in 2031. Debt maturing in 2012 was offered in a sealed bid.
First Southwest priced $92 million of Grapevine-Colleyville, Texas, Independent School District unlimited tax school building and refunding bonds. The bonds are rated Aaa by Moody’s and AAA by Standard & Poor’s.
Yields range from 0.35% with a 1.75% coupon in 2013 to 4.12% with a 5.00% coupon in 2036.
In the largest deal of the week, Citi priced for institutions $307.2 million of Los Angeles Department of Water and Power water system revenue bonds. The bonds are rated Aa2 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch.
Yields range from 1.44% with a 4.00% coupon in 2017 to 4.30% with a 5.00% coupon in 2041. The credits saw large drops during repricing, including those of 11 basis points for six- and seven-year credits, as well as 12 basis points for both legs of a split maturity at 10 years.
On the competitive sales ledger, JPMorgan won $127.9 million of Florida Department of Environmental Protection Florida Forever revenue refunding bonds. The bonds were rated A1 by Moody’s, AA-minus by Standard & Poor’s, and A by Fitch.
Yields range from 0.20% with a 3.00% coupon in 2012 to 2.71% with a 5.00% coupon in 2021. By early afternoon, credits had reportedly seen solid interest.
The equities markets continued their turbulent ways, posting strong gains to close the day. The markets rose by at least 3.95%, with the Dow Jones Industrial Average ending 423 points higher.
Traders were pulling for a recovery from the equities markets Thursday. Another rough outing in the stock markets, they noted, would likely shift muni investors’ focus to their equities portfolios and away from fixed income.