Both Treasury and municipal yields rallied in impressive fashion on a day that saw a resolution to the budget and debt-ceiling battle that many thought had raged for far too long.
Muni yields fell. Treasuries fell farther. Both reached low points for the year.
But market participants argued about the causes. Did poor economic data released recently raise fears of a double-dip recession? Did the resolution on Capitol Hill remove the immediate uncertainty and spur demand in the market? Was it a combination of the two?
Regardless, on a day of light supply for institutions, munis had a good day, a New York trader said.
“Activity was moderate,” he said. “Pricing was strong; the market was strong. We’re looking pretty good here.”
Muni yields beyond one-year notes cannonballed Tuesday, according to the Municipal Market Data triple-A curve.
Yields were two to three basis points firmer at the front of the curve.
They were five basis points lower for 2017 maturities, seven basis points lower for 2018 maturities, and eight basis points lower for maturities between 2019 and 2034. For maturities after 2035, there was a 10 basis- point drop on the day.
After 15 sessions at a calendar-year low yield of 0.40%, two-year muni yields fell two basis points to reach a new low of 0.38%.
The 10-year benchmark yield shed eight basis points to settle at 2.55%, four basis points below its previous low for the year. The 30-year yield dropped 10 basis points to 4.19%, four basis points beneath its low for 2011.
The debt ceiling and budget crisis may have come to a close, but growing fears of the economy helped to sustain a significant rally in Treasuries, making tax-exempt valuations particularly attractive by comparison.
The benchmark 10-year Treasury yield continues to hit new calendar-year lows. It closed at 2.61%, more than one percentage point off its high for 2011 of 3.72% on Feb. 8, according to MMD.
It fell a staggering 14 basis points on the day.
The two-year Treasury yield shed five basis points to land at 0.33%, one basis point below its former nadir for the year.
The 30-year yield dropped an incredible 19 basis points to reach a calendar-year low of 3.90%. It stands 86 basis points from its high for the year, at 4.76% on Feb. 10.
As expected, the muni bond industry is content to see a resolution of the debt-ceiling crisis and budget battle. In anticipation, dealers started to get involved in the secondary market near the end of Monday’s trading session, according to a Florida trader.
“Some customers have been holding back,” the trader said. “But once it passed the House yesterday, and now the Senate today, it was clear that this deal was going to be done. So today, the vote was already baked in. That’s why early this morning you started to see customers participate.”
The trader added that the day’s move in muni yields has more to do with light supply and the rally in Treasury yields than about fear of the economy.
If this were a simple flight to quality, he implied, that would mean that investors would head to triple-A-rated credit while shunning single-As, causing credit spreads to widen.
Instead, according MMD numbers, spreads between triple-A and single-A yields have tightened 12 basis points from July 1 to Aug. 1, as investors have stepped down the credit curve for yield.
The same spreads have been flat over the past three days, meaning that triple-A and single-A yields have fallen in tandem over that time.
Credit spreads between triple-A rated and triple-B rated yields have tightened less over the same period, falling just four basis points.
But the same principle applies — and those two spreads have been flat over the past three days, as well.
“The credit curve has tightened, not widened, over the past week, or so,” the trader said. “So the fear [of the U.S. economy] is not playing out in the credit cycle; it’s playing out in the rate cycle.”
Touching on the subject of light supply, the market is predicting just $3.25 billion in new volume this week. It is expected to be lower than last week’s revised $4.6 billion.
On Tuesday, JPMorgan priced for retail two legs of the week’s biggest deal issued by the New York City Transitional Finance Authority. Both pieces were rated Aa1 by Moody’s Investors Service and AAA by Standard & Poor’s and Fitch Ratings.
The firm led with $428.4 million of TFA tax-exempt multi-modal fiscal 2003 Series B bonds. Yields range from 1.26% with a 5.00% coupon in 2016 to 4.00% at par in 2029.
Debt maturing from 2019 through 2028 was not offered to retail investors.
JPMorgan also priced for retail $300 million of TFA fiscal 2012 Series A bonds. Yields range from 0.48% with a 2.00% coupon in 2013 to 3.36% with a 5.00% coupon in 2023.
Credits maturing from 2024 through 2027 were not offered to retail investors. Debt maturing in 2012 was offered in a sealed bid.
About $172 million of TFA bonds will come to the competitive market Wednesday.