Municipal bond yields found a semblance of balance Monday from rising Treasury prices and falling stock prices, all in the shadow of the expected surge of new issuance.
More rumblings from Europe instigated yet another jump of capital to safer havens. Munis, though, mostly tried to clear one table of inventory and set another one for the new supply.
“It was a tremendously strong Treasury market, and a very, very bad stock market,” a trader in New York said. “We’re at the moment influenced by neither, but both have served to keep us propped up to where we are. Interest rates are moving in our favor.”
Tax-exempt yields didn’t follow Treasuries lower Monday, according to the Municipal Market Data scale. They were steady through six years and beyond 12 years. Between seven and 12 years, they were one or two basis points higher.
The 10-year muni yield rose two basis points Monday to 2.24%. The 30-year and the two-year yields held steady on the day at 3.55% and 0.34%, respectively.
Treasury yields ended Monday’s session firmer. The benchmark 10-year Treasury yield plunged 14 basis points to 1.77%.
The 30-year yield sunk 16 basis points to 2.74%. The two-year yield ticked down two basis points to 0.24%.
Interest rates will rally to start the fourth quarter, as a still-shaky global economic picture will drive capital from riskier asset classes and into Treasuries, JPMorgan’s Peter DeGroot wrote in a recent analyst report. Consequently, the firm’s municipal group anticipates the curve would flatten in the two-to-10-year range and steepen in the 10-to-30-year range; 10-years demonstrate greater volatility than points that lie shorter and longer on the curve.
Interest rate volatility should remain high because of what’s happening in the markets in Europe.
This all relates to the European Financial Stability Facility and the subsequent movement of capital from highly “idiosyncratic” markets to risk-averse assets, DeGroot wrote.
“Several factors may impact demand for high-grade offerings moving forward,” he added, “including low/volatile yields, elevated supply, and lower reinvestment capital.”
More new issuance is expected for the week, rising to $8.26 billion. Last week, the market saw a revised $7.69 billion in new supply.
This could mean higher yields for a market past the short end of the curve, DeGroot wrote. “The elevated supply coupled with diminished redemption capital may provide the backdrop for somewhat cheaper market clearing levels in 10 years and longer on the curve,” he said.
Even though there may be more supply in the near term, significant cash on the sidelines and better fund flows will give the market the necessary capacity to absorb the excess bonds at somewhat higher spreads.
The key challenge for long-only investors is to see beyond the volatility and concentrate instead on the tenets that have determined market liquidity traditionally, DeGroot wrote.
Mainly, supply-demand, policy, and credit fundamentals will dictate market conditions over time.
The general feeling in the market is that the week’s expected supply will have to be pretty attractively priced for deals to get done, traders said.
“We saw that supply was somewhat challenging for the market last week, and we have more of it this week,” a trader in New York said. “If Treasuries hang in here, you’ll get the deals done, but I don’t think it’s going to be at the tightest of levels. I think you’re going to have to give buyers somewhat of a concession.”
Another trader from New York agreed. The new supply almost has to wait for the buyers to reveal themselves, he said: “That’s the best way for the more astute investment bankers to go out and price the bonds.”
Still, muni ratios to Treasuries moved ever cheaper, according to MMD. The two-, 10- and 30-year ratios stood at an outlandish 142%, 127%, and 130%, respectively.
The 10-year and the 30-year ratios are at their highest levels since April and March 2009, respectively.
On the day, Morgan Stanley priced for retail $615.7 million of Triborough Bridge and Tunnel Authority general revenue refunding bonds for New York’s Metropolitan Transportation Authority bridges and tunnels. The bonds were rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s and Fitch Ratings.
Yields range from 0.38% with a 2.00% coupon in 2013 to 3.56% with coupons of 3.50% and 5.00% in a split maturity in 2028.
Debt maturing in 2012 was offered in a sealed bid. Credits maturing in 2023, 2025, and 2027 were not offered.
RBC Capital Markets priced for retail $521.7 million of Oklahoma Turnpike Authority refunding second senior revenue bonds. The bonds were rated Aa3 by Moody’s and AA-minus by Standard & Poor’s and Fitch.
Yields range from 0.74% with coupons of 1.00% and 5.00% in multiple maturities in 2014 to 3.71% with a 3.70% coupon in 2028. Debt maturing in 2012 and 2013 was offered in a sealed bid. Some credits maturing in split and multiple maturities from 2014 through 2028 were not offered.
The equities markets didn’t take too well to the news from Europe. The major indexes were all down from the open by at least 2.36%. The Dow Jones Industrial average fell 258 points on the day.
In economic news, the Institute for Supply Management reported Monday that the overall economy grew for the 28th consecutive time, while the manufacturing sector expanded for the 26th time.
The ISM index climbed to 51.6 in September from 50.6 in August, according to the ISM’s monthly report on business. An index read below 50 signifies a slowing economy; a level above 50 indicates one that is expanding. A measure of 50 shows an unchanged economy.