The tax-exempt market continued its week of losses Thursday as supply overwhelmed demand and traders rejected near-record low rates.
The primary market saw concessions this week on new deals and the secondary market showed weakness.
“It is extremely quiet today,” a New York trader said. “I am seeing a bunch of bid-wanteds and pieces are weaker, but most of the trade flow is happening in the 2025, 2026, and 2027 and on out, because action is where the yield is.”
The Puerto Rico Public Buildings Authority deal helped the market Thursday, he said. “They shut down a few maturities already,” he said. “It went pretty well, considering there were downgrades in that arena. People are yield-hungry regardless of credit quality.”
Yield-hungry investors make for some good trades, but 12 to 36 months out, “things could get ugly,” he said.
Activity was busier Thursday morning, though munis were still weaker.
“Munis are weaker because of supply and rates,” another New York trader said. “There is too much supply and rates are so low.”
Secondary market trading is very slow since most participants are focused on the primary, he said.
“It’s not pretty out there,” the trader added. “And this has been a long time coming.”
Munis were weaker Thursday for the fourth consecutive trading session, according to the Municipal Market Data scale. Yields inside four years were steady while yields outside five years jumped between two and five basis points.
On Thursday, the 10-year yield jumped five basis points to 1.90% while the 30-year yield spiked up three basis points to 3.19%. The two-year was steady at 0.32% for the fifth consecutive trading session.
After rising 15 basis points so far this week, the 10-year yield now remains 23 basis points above its record low of 1.67% set Jan 18. The 30-year yield finished 15 basis points off its record low of 3.04% set on Friday.
Treasuries were mixed Thursday with yields on the short end and long end rising while yields in the belly of the curve fell. The two-year yield rose one basis point to 0.28% while the 30-year yield jumped two basis points to 2.76%. The 10-year yield fell two basis points to 1.65%.
In the primary market, Morgan Stanley priced and re-priced $855.5 million of Illinois Metropolitan Pier and Exposition Authority bonds in tax-exempt and taxable series, rated AAA by Standard & Poor’s and AA-minus by Fitch Ratings.
The first series, $94.7 million of McCormick Place expansion project bonds, yielded 4.15% with a 5% coupon in 2042. The bonds are callable at par in 2022. Yields were lowered five basis points from preliminary pricing.
Yields on the second series, $748.8 million of Illinois’ McCormick Place expansion project refunding bonds, ranged from 1.98% with a 3% coupon in 2018 to 4.50% with a 5% coupon in 2052. Credits maturing in 2013 were not formally re-offered. The bonds are callable at par in 2022 except for bonds maturing in 2022 that are callable at par in 2017. Yields were lowered as much as 12 basis points from preliminary pricing.
Bonds on the third series, $12 million of taxable series refunding bonds for the McCormick Place project, were priced at par to yield 0.44% in 2012 and 0.70% in 2013.
Goldman, Sachs & Co. priced $589 million of Puerto Rico Public Buildings Authority government facilities revenue refunding bonds, rated Baa1 by Moody’s Investors Service, BBB by Standard & Poor’s and BBB-plus by Fitch.
Yields ranged from 1.82% with a 4% coupon in 2014 to 5.45% with a 5.25% coupon in 2042. The bonds are callable at par in 2022.
Ramirez & Co. priced and repriced $410.7 million of Massachusetts Bay Transportation Authority assessment bonds, rated Aa1 by Moody’s and AAA by Standard & Poor’s.
Yields ranged from 0.62% with a 3% coupon in 2015 to 4.05% priced at par and 3.50% with a 5% coupon in a split 2041 maturity. Credits maturing in 2013 were not formally re-offered. The bonds are callable at par in 2022. Yields were lowered two basis points in the belly of the curve from preliminary pricing.
In the secondary market, trades compiled by data provider Markit showed weakening across the curve.
Yields on Central Plains, Neb., Energy Project 5s of 2042 jumped six basis points to 4.85% while Texas 5s of 2021 jumped five basis points to 1.48%.
Yields on Fairfax County, Va., 5s of 2019 and Houston Airport System 5s of 2032 each jumped four basis points to 1.21% and 3.74%.
Yields on Los Angeles Unified School District 5s of 2027 and Maryland 5s of 2020 each rose three basis points to 2.86% and 1.25%.
Throughout the weak, muni-to-Treasury ratios have fallen as munis outperformed Treasuries and became relatively more expensive. Munis weakened, but not as much as their taxable counterparts.
The two-year muni yield to Treasury yield ratio fell to 114.3% on Thursday from 123.1% last Friday. The 10-year ratio dropped to 115.2% from 119.9% last Friday. The 30-year ratio fell to 115.6% on Thursday from 120.6% at the end of last week.
Thursday afternoon, the Federal Reserve said the municipal bond market shrank to $3.73 trillion in the first quarter 2012, down $11.3 billion from the previous quarter.
Household holdings declined $45 billion in the first quarter while banks and thrift holdings climbed $10 billion, insurance companies showed slightly higher holdings and mutual fund holdings grew by $21 billion.
