Munis Weaker, But 2-Year Hits New Low

The tax-exempt market continued to lose ground for its third consecutive session as demand in the primary market failed to buoy munis.

Bond prices were cut on new deals from Monday retail order periods and the secondary market showed weakening.

While bonds are weaker, traders still said deals were well-received.

“We’re not far off of the recent all-time lows and the issuers are benefiting,” said a trader in Connecticut. “Interestingly, with absolute rates so low, investors are stepping out on the credit spectrum, so credit spreads are tightening a bit. Luckily, overall supply is moderate so demand is expected to remain strong.”

The trader participated in a refunding deal Tuesday and said “feedback has been great.”

“The market is still fairly quiet,” a New York trader said. “People have been selling since last week, but there’s still a bid out there. But not a good one.”

Munis were mostly steady to weaker Tuesday, according to the Municipal Market Data scale. Yields inside four years were mostly steady while yields between the five-year and 16-year jumped between one and five basis points. Outside 17 years, yields were steady.

On Tuesday, the 10-year yield jumped five basis points to 1.84%. The 30-year yield was steady at 3.22%.

The two-year was the anomaly, as the yield fell one basis point to 0.29%, setting a new low as recorded by MMD. The previous record of 0.30% was set Aug. 10.

Since the most recent rally began Jan. 24, muni yields fell as much as 22 basis points across the curve up until Friday. The losses Friday and this week on the 10-year have erased gains munis made since then.

The 10-year range has been the biggest loser. “Another round of weakness hit munis Tuesday afternoon with offerings on high-grades seeing additional round of cuts, heaviest in the 10-year range,” said MMD’s Domenic Vonella.

Treasuries continued to weaken across the curve. The two-year yield rose two basis points to 0.26%, while the benchmark 10-year yield soared eight basis points to 1.98%. The 30-year yield jumped six basis points to 3.15%.

If the muni market turns around and starts to show strength, some analysts are recommending using the opportunity to sell.

“We advocated a selective approach to local credits in North Carolina, adding to a list that includes Rhode Island and Georgia where local issuers will bear the brunt of the decline of fiscal flexibility at the state level,” analysts at Trident Municipal Research said. “We would look at any general market strength this week as an opportunity to lighten up exposure — portfolio managers should have offerings in the market on any holdings in these areas.”

In the primary market, several big deals priced Tuesday. Goldman, Sachs & Co. priced for institutions $276.5 million of Shelby County, Tenn., general obligation refunding bonds, rated Aa1 by Moody’s Investors Service, and AA-plus by Standard & Poor’s and Fitch Ratings.

Yields on the first series, $264.1 million of GO refunding bonds, ranged from 0.21% with a 2% coupon in 2013 to 2.75% with a 3.5% coupon and 2.64% with a 5% coupon in a split 2028 maturity. The bonds are callable at par in 2022 except for credits maturing in 2023 and 2024. Prices were cut two basis points on the long end from retail pricing Monday.

Yields on the second series, $15.1 million of special GO school refunding bonds, ranged from 0.21% with a 2% coupon in 2013 to 1.41% with a 4% coupon in 2019. Prices were cut three basis points on the long end from retail pricing Monday.

Citi priced $225 million of San Antonio Water System revenue refunding bonds, rated Aa1 by Moody’s, AA by Standard & Poor’s and AA-plus by Fitch.

Yields ranged from 0.40% with a 3% coupon in 2014 to 2.89% with a 4% coupon in 2028. Credits maturing in 2013 were offered via sealed bid. The debt is callable at par in 2022.

JPMorgan priced for institutions $77.5 million of Washington State University general revenue bonds, rated Aa2 by Moody’s and AA by Standard & Poor’s.

Yields ranged from 0.28% with a 2% coupon in 2013 to 3.83% with a 3.75% coupon and 3.58% with a 5% coupon in a split 2037 maturity. The bonds are callable at par in 2021. Prices were bumped one to three basis points on the short end and cut three to five basis points on the long end from retail pricing Monday.

In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening.

A dealer sold to a customer Bay Area Toll Authority 7.043s of 2050 at 4.94%, nine basis points higher than where they traded Monday.

A dealer bought from a customer New York Liberty Development Corp. 5s of 2041 at 3.90%, eight basis points higher than where they traded last Friday.

Another dealer purchased from a customer New York City Municipal Water Finance Authority 5s of 2045 at 3.83%, three basis points higher than where they traded Monday.

A dealer bought from a customer Hawaii 5s of 2021 at 1.90%, one basis point higher than where they traded Monday.

Over the past week, muni-to-Treasury ratios have fallen as munis outperformed and became more expensive.

The five-year ratio fell to 90.7% on Monday from 97.3% the week before. The 30-year ratio fell to 104.2% from 106% the previous week.

The 10-year spot has reversed, with the ratio increasing to 94.2% on Monday from 92.4% the previous week.

All ratios increased on Monday. “They still have not yet reached levels with adequate value,” said MMD’s Daniel Berger.

The slope of the yield curve continues to flatten. The 10- to 30-year slope fell to 143 basis points from 146 basis points the week before.

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