Scarce Supply Strengthens Muni Prices

Munis started off strong and ended even stronger Thursday as limited supply appeared to increase demand and push tax-exempts higher. Buyers weren’t able to buy bonds without paying high prices.

“There were buyers everywhere,” said a New York trader. “Dealers today were bumping prices. They are running out of inventory and can’t replace their bonds. So they are holding mostly for internal customers.”

He added there were “no Street offerings.”

By Thursday afternoon, municipals showed signs of firming despite choppy Treasuries.

“It’s been a consistent grind and a similar atmosphere over the past few weeks,” said a trader in North Carolina. “There is not enough paper around with the primary being so dry.”

He added that most of the activity is on the long end. “Most of the push has been in the 15-year to 30-year,” he said. “It’s a yield grab.” That’s even more shocking given that “everything has tightened significantly from where it’s supposed to be — especially in the 20-year to 30-year maturities.” The trader said there is no value or activity inside 10 years.

“Munis are definitely better,” he said, referring to a decline in yield. “We are seeing about two to four basis points in the 20-year and one to three basis points in the 30-year.”

However, overall activity during the first week of the new year has been slower.

“It seemed like sell-side activity was still at holiday-week levels,” another New York trader said.

Throughout Thursday, munis strengthened, according to the Municipal Market Data scale. While traders said activity was limited on the short-end, the one-year yield fell five basis points on the MMD scale. The two-year to eight-year yields held steady while the nine-year and 10-year yields fell one basis point. The 11-year yield dropped two basis points while yields outside the 12-year plunged three basis points.

The two-year yield closed flat at 0.42% for its third consecutive trading session. The 10-year yield closed down one basis point to 1.87% and the 30-year fell three basis points to 3.54%.

Treasuries were choppy Thursday, but by the end of the day they finished with a fourth consecutive trading session of losses. The benchmark 10-year yield finished up one basis point from Wednesday to 2.00% and 14 basis points higher when Treasuries began weakening last Friday.

The 30-year yield finished two basis points higher from Wednesday and 19 basis points higher from last Friday. The two-year was steady at 0.27%, but still two basis points higher than where it stood last week.

Thursday was the most active day of the week in the primary market.

RBC Capital Markets priced $163.6 million of Texas Tech University System Board of Regents revenue financing system and refunding and improvement bonds. The credit is rated AA by Standard & Poor’s and Fitch Ratings.

Yields ranged from 0.18% with a 2% coupon in 2012 to 4.08% with a 4% coupon in 2041. The bonds are callable at par in 2021.

“The only major deal of the week, Texas Tech University saw strong interest in a number of maturities,” said MMD’s Randy Smolik. “They were able to pare yields in the 2015-2025 range and longer than 2030, in some cases by as much as six basis points.”

On the competitive calendar, Bank of America Merrill Lynch won the bid for $83.6 million of Suffolk County Water Authority water system revenue refunding bonds. The credit is rated AA-plus by Standard & Poor’s and AAA by Fitch.

Yields ranged from 1.44% with a 5% coupon in 2019 to 2.08% with a 4% coupon in 2022. Bonds maturing between 2023 and 2026 were sold but not available. The debt is callable at par in 2021.

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

A dealer bought from a customer Orange County, Fla., Health Facilities Authority 5s of 2039 at 4.42%, 15 basis points lower than where they traded Wednesday. Another dealer bought from a customer California 5.125s of 2033 at 4.20%, 11 basis points lower than where they traded Tuesday.

Bonds from an interdealer trade of New York Liberty Development Corp. 5s of 2041 yielded 4.09%, nine basis points lower than where they traded Wednesday. Bonds from an interdealer trade of Washington 5s of 2035 yielded 3.62%, four basis points lower than where they traded Wednesday.

The five-year and 10-year muni-to-Treasury ratios have been hovering around the high 90s for several weeks. The five-year ratio closed at 97.8% while the 10-year closed at 94.5%. The 30-year muni-to-Treasury ratio fell to 117.82% this week, a low not seen since the end of October.

In economic news, seasonally adjusted jobless claims fell 15,000 to 372,000 for the week ended Dec. 31, the Labor Department said. The drop in claims was a slightly larger decline than expected; economists had predicted a 375,000 reading.

“The jobless claims data continue to point to a pickup in the pace of job creation, although we are entering a period where volatility around year-end has made claims a less reliable indicator,” wrote economists at RDQ Economics. “The four-week average of claims has now been below 400,000 for eight consecutive weeks and continues to decline.”

“This suggests that the pace of job separations has slowed and suggests a pickup in net job creation,” the analysts wrote. “We believe that the balance of risks lies to the upside of what was already an above-consensus projection for job growth.”

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