Top quality municipal bonds were decidedly stronger at mid-session on Tuesday, traders said, as yields weakened to near record low levels.
The yield on 10-year benchmark muni general obligation was from two to four basis points weaker from 1.51% on Monday, while the 30-year muni yield was from three to five basis points weaker from 2.22%, according to a midday read of Municipal Market Data's triple-A scale.
U.S. Treasuries were mixed on Tuesday. The yield on the two-year Treasury rose to 0.72% from 0.71% on Monday, while the 10-year Treasury yield was unchanged from 1.61% and the yield on the 30-year Treasury bond decreased to 2.42% from 2.43%.
On Monday, the yield on 10-year muni was only four basis points above its all-time low of 1.47% set back in 2012. On Friday, June 10, the yield on 30-year muni dropped to its fourth straight record low.
The 10-year muni to Treasury ratio was calculated at 93.5% on Monday compared to 92.9% on Friday, while the 30-year muni to Treasury ratio stood at 91.3% versus 90.7%, according to MMD.
MSRB: Previous Session's Activity
The Municipal Securities Rulemaking Board reported 32,557 trades on Monday on volume of $10.59 billion.
Primary Market
The New York State Environmental Facilities Corp. came to market with $493.32 million of Series 2016A state clean water and drinking water revolving funds revenue bonds.
Goldman Sachs priced the NYS EFC's issue, New York City Municipal Water Finance Authority Projects Second Resolution bonds, for institutions after a one-day retail order period.
The bonds were priced to yield from 0.66% with 2% and 5% coupons in a split 2018 maturity to 2.40% with a 4% coupon in 2036; a 2041 term bond was priced as 5s to yield 2.25%. A term bond in 2046 was priced as 2 5/8s to yield 2.70% and as 4s to yield 2.55% in a split maturity. The 2017 maturity was offered as a sealed bid.
The deal is rated triple-A by Moody's Investors Service and S&P Global Ratings and AA-plus by Fitch Ratings.
Since 2006, the NYS EFC has issued about $7.4 billion of debt, with the largest issuance occurring in 2012 when it sold roughly $1.1 billion of securities. The corporation has only sold more than $1 billion a year twice since 2006 and saw a low year of issuance in 2010 when they came with $505 million.
JPMorgan Securities priced the Metropolitan Washington Airports Authority's $376.42 million of Series 2016A and Series 2016B airport system revenue refunding bonds.
The $352.88 million of Series 2016 bonds, subject to the alternative minimum tax, were priced as 5s to yield from 2.45% in 2030 to 2.56% in 2032 and to yield from 2.63% with a 5% coupon in 2034 to 2.97% with a 4% coupon in 2036. The $23.54 million of Series 2016B non-AMT bonds were priced as 5s to yield from 1.09% in 2020 to 2.26% in 2032. The deal is rated A1 by Moody's and AA-minus by S&P and Fitch.
JPMorgan also priced the California Infrastructure and Economic Development Bank's $140.22 million of Series 2016A infrastructure state revolving fund revenue bonds.
The bonds were priced to yield from 0.60% with a 2% coupon in 2017 to 2.42% with a 4% coupon in 2036. A term bond in 2041 was priced to yield 2.22% with a 5% coupon and another term bond in 2046 was priced to yield 2.56% with a 4% coupon. The deal is rated triple-A by Moody's, S&P and Fitch.
In the competitive arena on Tuesday, the Florida State Board of Education sold $145.41 million of Series 2016C public education capital outlay refunding bonds.
JPMorgan won the issue with a true interest cost of 2.48%. Pricing information was not immediately available. The deal is rated Aa1 by Moody's and triple-A by S&P and Fitch.
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar increased $219.9 million to $10.42 billion on Tuesday. The total is comprised of $4.75 billion of competitive sales and $5.66 billion of negotiated deals.
Citi Looks at Foreign Buyers of Munis
The foreign demand for U.S. securities is on the rise, as overseas investors flee negative yielding debt in Europe and Japan and head for American shores.
"Our recent conversations with overseas clients indicate that foreign demand for municipals is on the rise," analysts at Citi Research wrote in Tuesday report, adding that "this view is also supported by the recent Fed flow of funds data, which show that as of Q1 2016, foreign investors have added $6.7 billion to their municipal holdings over the last year and $2.0 billion over the last quarter. At present, foreign investors account for 2.4% of all municipal holdings."
However, Citi don't see a huge surge in foreign demand coming in the future.
"Despite recent trends, we believe net direct foreign holdings are unlikely to increase by more than $10 billion over the next year," Citi wrote. "This is because of two reasons: 1) Municipals are nowhere as ubiquitous as Treasuries and remain an exotic asset class for most foreign investors. 2) Hedging [foreign exchange] exposure remains costly especially in light of recent FX volatility, and this reduces the attractiveness of tax-exempt municipals, which are currently trading almost as rich as or richer than USTs."
Despite this, Citi says it believes the yields differential between most high-grade municipal bonds and Japanese and Eurozone debt is at levels such that munis are attractive despite the cost of hedging foreign exchange exposure.
