New offerings in the tax-exempt primary market showed solid demand for value Wednesday.
The practice of making concessions on some high-grade issues Tuesday to move product followed through in Wednesday’s session. Some issues required some cheapening for the institutional order period, a trader in New Jersey said.
“Absolute yields are so low that buyers are resistant to paying them, so spreads have to give to some extent,” he said. “And we saw a little bit of that today. But there’s still fairly good demand.”
Tax-exempt yields, after holding steady for three days, mostly weakened Wednesday, according to the Municipal Market Data scale. The very front end of the curve held steady. Maturities three years and out were one or two basis points higher.
“Munis have held in the last couple of days relative to Treasuries,” a trader in California said. “There’s a bit of capitulation on that today, where we see the long end off a couple of basis points.”
The 10-year yield climbed two basis points from its record low, as measured by MMD, to 2.09%. The 30-year yield inched up a basis point to 3.67%, one basis point from its lowest level in at least three decades. The two-year yield stayed at 0.30% for a 25th consecutive session, apparently content to linger at its lowest level in more than 40 years.
Treasury yields had been weaker for most of the session, but fell in the afternoon to end the day mostly firmer. The 10-year benchmark yield ticked up one basis point to 2.00%. Though higher, it’s still near a range it hasn’t seen in roughly five decades. The 30-year yield fell five basis points to 3.28%. The two-year yield declined two basis points to 0.19%.
Volume in the primary is expected to rise from last week’s scant supply. Industry estimates place new issuance for this week at $4.65 billion, not including $5.4 billion of California revenue anticipation notes. Estimates for last week’s volume were revised downward to $1.95 billion.
In the negotiated market Wednesday, Barclays Capital priced $430.5 million of California State University Trustees system-wide revenue bonds.
The bonds are rated Aa2 by Moody’s Investors Service and A-plus by Standard & Poor’s.
Yields range from 0.32% with a 2.00% coupon in 2012 to 4.60% with a 5.00% coupon in 2042. There were no more orders taken for credits maturing from 2012 through 2019, as well as for one half of split maturities in 2020, 2021, 2022, 2027, and 2031. At repricing, 10-year yields were five basis points lower.
Wells Fargo Securities priced $5.4 billion of California Rans in two series. The notes were rated MIG 1 by Moody’s, SP-1-plus by Standard and Poor’s, and F1 by Fitch Ratings.
Yields for the first series, $4.9 billion, stood at 0.40% with a 2.00% coupon. Yields for the second series, $500 million, settled at 0.38 % with a 2.00% coupon.
The deal did well in both the retail and institutional order periods, said the New Jersey trader, whose firm was involved in the pricing.
“That deal was extremely well received,” he said. “It did well in the retail period. And it cleaned up really well with oversubscription in the institutional period, where they combined the secondary retail and shortened it and went into institutional today. They were able to lower the yields by two basis points. To me, that’s a very good indication of what demand is like.”
Investor flows have also shifted somewhat in the face of the new issuance. Last week, the municipal market saw positive flows into tax-exempt muni bond mutual funds for the first time in seven weeks. Taxable bond funds, already in the black, saw a huge jump.
The week ending Sept. 7 saw $565 million in inflows, according to Lipper FMI. Taxable bond flows also improved quite sharply, according to Citi numbers, to $4.81 billion from $1.76 billion the previous week.
Equity fund outflows are likely the largest factor behind the positive momentum into fixed-income funds, Citi muni bond analyst George Friedlander wrote in a recent report.
The market must now gauge how muni bond fund flows change in a net neutral stock environment.
“Nevertheless, with yields in the cash market down so sharply, the reported yields at the funds, which lag sharply as rates drop this sharply, should be a draw,” Friedlander wrote. “We would not be at all surprised to see several straight weeks, at the least of positive flows in muni funds.”
But the picture has changed this week among some other muni fund accounts, the California trader said. Financial advisors and muni exchange-traded funds have seen a shift.
“It seems the financial advisor channel and the ETF channel has slowed down a little bit,” he said. “They’re still doing fine, but the volume of purchases has definitely slowed. There was a big rush into them in the last three or four weeks that has plateaued and stabilized a bit.”
