The tax-exempt market was weaker Tuesday as munis followed Treasuries lower on positive news from Greece. While munis were weaker, many traders said deals in the primary were being priced attractively and saw strong interest, highlighting demand from investors in the supply-starved market.
“Deals are going OK,” a Los Angeles trader said. “We are taking indication periods for our deals and the long bonds are off and Municipal Market Data is cutting prices, but we are seeing very good interest.”
In California, he said, most traders are looking ahead to the big general obligation deal expected to price next week. “We are getting these deals done and see if supply forces yields up,” the trader added. “Stocks are up and there are some factors that tend to push yields up, but deals are going well.”
While positive news that Greece received its second bailout package pushed some investors into riskier assets and Treasuries subsequently moved lower, not all traders agreed the Greek drama was officially over.
Even though “the Greece bailout is pretty much all done,” a New York trader said, everyone still thinks Greece will continue to have troubles, “so there is a flight to quality and a muni rally.”
Munis were weaker Tuesday, according to the MMD scale. Yields inside four years were steady while yields outside five years rose between one and four basis points across the curve.
On Tuesday, the two-year yield was steady at 0.26%, its record low as recorded by MMD on Thursday. The previous record of 0.29% was set Feb. 7. The 10-year yield rose three basis points to 1.86% while the 30-year yield rose four basis points to 3.27%.
Treasuries were much weaker Tuesday as the Dow Jones Industrial Average briefly crossed the 13,000 mark for the first time since May 2008. The two-year yield rose one basis point to 0.31% while the 30-year yield increased three basis points to 3.19%. The benchmark 10-year yield jumped four basis points to 2.05%.
In the negotiated market, Morgan Stanley priced for retail $800 million of New York City GOs, rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings. Prices were not available by press time.
“Buyers seemed patient to wait for new-issue pricings with little fear of the market getting away from them as Treasuries continued to backpedal,” wrote MMD’s Randy Smolik, referring to the retail order period of the New York deal. “Offerings appeared attractive in the belly of the loan where spreads were as wide as plus 48 basis points.”
In the competitive market, JPMorgan won the bid for $49 million of Boulder, Colo., revenue bonds, rated Aa1 by Moody’s and AA-plus by S&P. Bonds matured from 2012 with a 2% coupon to 2031 with a 4% coupon. Prices were not available.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening from last week.
A dealer bought from a customer Tennessee 5s of 2022 at 1.92%, four basis points higher than where they traded Friday.
Bonds from an interdealer trade of Dormitory Authority of the State of New York 5s of 2027 yielded 2.92%, four basis points higher than where they traded last Friday. Bonds from another interdealer trade of Puerto Rico Aqueduct and Sewer Authority 6s of 2047 yielded 5.08%, three basis points higher than where they traded Friday.
A dealer sold to a customer San Antonio 5s of 2023 at 2.19%, one basis point higher than where they traded Friday.
Over the course of the past week, muni-to-Treasury ratios fell across the curve as munis outperformed and became more expensive. The five-year ratio fell to 75.6% on Friday, down from 82.5% the week prior. The 10-year muni-to-Treasury ratio dropped to 91% from 93.4% the week prior. The 30-year ratio fell to 102.2% from 104.8% last Friday.
The 10- to 30-year slope of the curve also fell over the course of the week, falling to 140 basis points from 143 basis points the week prior.
Muni analysts at Citi say the yield curve is relatively steep, despite the collapse in yields. Investors holding cash are earning almost zero, forcing many to reach out on the yield curve to find a higher level of income. This should gradually pull investors off the sidelines and out along the yield curve.
“But despite these two converging patterns, the slope of the muni yield curve remains steep, with 30-year paper still yielding 308 basis points more than one-year paper,” wrote George Friedlander.
The large number of factors that have kept the muni yield curve relatively steep include a substantial increase in Treasury yields. “Historically, the muni yield curve has nearly always been steeper than the Treasury curve, partly for supply-demand related reasons and partly because munis typically include an imbedded 10-year call option, which is worth more to the issuer as one moves out along the yield curve beyond 10 years,” Friedlander said. “There is no reason that the 'extra’ steepness shouldn’t be the case now.”
Other factors include resistance from individual investors that venture too far out on the curve with yields all along the curve at historical lows, the lack of natural buyers for longer maturities and tax-risk concerns.
Even though the yield curve is fairly steep, he said, the average maturity of bonds outstanding has declined. “The total amount of municipal bonds outstanding declined by the largest amount in the history of the market in 2011,” Friedlander wrote. “We also noted that there has been a relative dearth of long revenue-bond project financings, which tend to have particularly long average and final maturities.”
The transition to current or near-current refundings from advanced refundings has also led to shorter average maturities in outstanding bonds. “It reduces the average maturity of refunding bonds, since a current refunding of a given bond will be shorter than an advanced refunding for the same bond,” Friedlander wrote.
It also “reduces the amount of time during which two sets of bonds will be outstanding for the same issue, since the current or near-current refundings will either have no advanced refunded debt outstanding, or will only have it for a very short period of time,” he said.