Positive news that Greece will not hold a voter referendum on the austerity plan added confidence to the market, pushing Treasuries down, and munis followed.
“It’s stalled a little here and the attention has been elsewhere,” a trader in Chicago said. “We are looking at a 30-day visible supply that is as high as its been since last December. Munis are attractive on a relative basis but there are still absolute yields that, from an investor perspective, are not attractive. Investors are not motivated to put money to work at these low levels.”
The trader added that due to redemptions, there is “money to put to work” but secondary trading activity has slowed. “A lot of the names out there are a little tired and there is a hangover from new issues.”
Thursday, muni yields closed up from the belly of the curve and beyond, according to the Municipal Market Data scale. Yields on credits within the five-year range were flat, while yields between 2017 and 2022 closed up two basis points. Yields on 2023 credits increased three basis points, followed by a four basis point spike in yields on credits maturing between 2024 and 2033. Yields on credits beyond 2034 rose five basis points.
The two-year closed flat at 0.42%, the 10-year closed up two basis points at 2.30%, and the 30-year finished five basis points higher at 3.71%.
Treasuries were mixed. Investors flocked away from the credits this morning, came back into the market in early afternoon as yields fell, and ended the day on a sell-off. The 10-year yield ended the day up seven basis points to 2.07%, while the 30-year yield closed up nine basis points to 3.12%. The two-year was flat at 0.24%.
By afternoon, the tax-exempt market was in flux with no clear direction coming from the primary market or from Treasuries. “The market is drifting a little bit,” a trader in New York said. “There are no big deals so we are waiting to see what direction it takes.”
Market participants agreed that most activity would come back as the market stabilized. “It’s been a whipsaw in the market,” a trader in New Jersey said. “One day it’s up, one day it’s down.”
“A lot of traders are a bit tired of the seesaw in the market,” the trader said.
Activity and trading are relatively light despite heavy issuance this week, the trader said, causing market participants to “be skittish in the secondary.”
The primary market was extremely quiet. On the negotiated calendar, Morgan Stanley priced $88.6 million of Kansas City, Mo., sanitary sewer system improvement refunding revenue bonds, rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s. Yields ranged from 0.20% with a 2% coupon in 2012 to 3.95% with a 5% coupon in 2037. The bonds are callable at par in 2021.
JPMorgan priced $75 million of Cleveland airport system revenue bonds, rated Baa1 by Moody’s and A-minus by Standard & Poor’s and Fitch Ratings. Credits that were insured by Assured Guaranty Municipal Corp. were rated Aa3 by Moody’s and AA-plus by Standard & Poor’s.
Yields on naked bonds ranged from 1.26% with a 3% coupon in 2013 to 2.97% with a 5% coupon in 2017. Yields on wrapped bonds ranged from 2.41% with a 5% coupon in 2016 to 4.25% with a 4% coupon in 2024. The bonds are callable at par in 2021.
The competitive calendar was light Thursday. Robert W. Baird won the largest deal, $50 million of general obligation bonds for Tulsa, Okla. The bonds are rated Aa1 by Moody’s and AA by Standard & Poor’s. Pricing was not available by press time.
In the secondary market, upward drift in yields inside 10 years was contained to only a few basis points. “It was notable how constrained the selling pressure and bidding support was from roughly 11 years and shorter versus out further on the curve,” said MMD analyst Randy Smolik. “The markets were less defined the further one travels out.”
Trades reported by the Municipal Securities Rulemaking Board showed softening in the 15-year range. Bonds from an interdealer trade of Houston Community College System 5s of 2026 yielded 3.44%, 11 basis points higher than where they traded Wednesday.
A dealer bought from a customer Connecticut 5s of 2026 at 3.25%, nine basis points higher than where they traded Wednesday. A dealer sold to a customer Pflugerville, Texas, Independent School District 5s of 2033 at 3.25%, five basis points higher than where they traded Wednesday.
The five-year muni is the hot spot now, according to MMD. Analyst Daniel Berger noted the five-year muni-to-Treasury ratio closed at its highest level in more than two and a half years. “Clearly, an investor seeking value could achieve outperformance by investing in the five-year range,” he said.
The five-year muni-to-Treasury ratio closed at 133.7%. The 10-year ratio closed at 114% and the 30-year ratio was at 120.4%. Others say 2020 bonds are the sweet spot.
Chris Mier, strategist at Loop Capital Markets, said the nine-year spot is “attractive and should be chosen over the eight- or the 10-year.” On longer maturities, the 11- to 19-year is expected to outperform over the next 30 days, Mier noted.
In economic news, the European Central Bank, in a surprise move, cut interest rates 25 basis points, lowering its main refinancing rate to 1.25%.