Municipal bonds continued to garner appetite Tuesday as weak economic data pushed cash into Treasuries and kept tax-exempt valuations attractive.
Long-term munis saw the most action, as bonds maturing beyond 2029 saw yields decline five basis points, according to Municipal Market Data. Bonds within the three-year range held steady while all others saw yields fall two to four basis points.
“There was tremendous retail demand,” a trader in New York said. “We were helped by Treasuries, certainly, and the stock market was under pressure. It was impressive.”
The benchmark 10-year yield fell three points Tuesday to 2.59%, its lowest since Nov. 9, 2010. Its yield has now dropped 68 basis points since April 11, according to MMD.
The two-year muni held steady at 0.46%, while the 30-year yield declined five basis points to 4.31%, the lowest since Dec. 1, 2010.
The rally helped Raymond James sell $84 million of putable, variable-rate refunding debt for the Northside Independent School District in Bexar County, Texas. The top-rated bonds, enhanced by the Texas Permanent School Fund, saw yields fall five basis points in a revised pricing to 1.35% on the 2039 maturity. A mandatory put date is in June 2014.
M.R. Beal & Co. sold a three-pronged, $326.9 million Connecticut deal to institutional buyers. The general obligation bonds, rated double-A by all three credit agencies, was first offered to retail investors Friday and Monday.
“The loan was very well-received — we saw very good reception up and down the loan,” said Jay Alpert, executive vice president at M.R. Beal.
In the fixed-income portion, yields ranged from 2.37% on a 2.30% coupon in 2019 to 3.14% on a 5% coupon in 2023.
A second series of taxable notes offered yields from 2013 through 2015, offering spreads between 35 and 53 basis points over comparable Treasuries, after prices were marked up in the morning. A third series of floating-rate tax-exempt debt, for $75 million, was offered with maturities in 2016 and 2019. They offered 65 and 110 basis points over the SIFMA rate, respectively.
Jefferies & Co. priced $130 million of water financial assistance bonds for Texas. Boasting top ratings from Moody’s Investors Service and Fitch Ratings and an AA-plus rating from Standard & Poor’s, the bonds offered yields from 0.54% in 2013 to 4% in 2030.
“The abundance of triple-A Texas credits have traditionally kept these credits from moving closer to spreads associated with other general market triple-A paper,” wrote MMD’s Domenic Vonella.
The risk trade was clearly off Tuesday as housing starts fell 10.6% in the latest survey to an annual pace of 523,000, upsetting the Street’s forecast for a 3.6% bump to 569,000. Industrial production data was unexpectedly flat in April, after rising 0.7% in March. Economists were expecting a 0.4% increase.
The Dow Jones Industrial Average tumbled 69 points as Treasuries moved to fresh calendar year highs. The 10-year Treasury yield fell below the 3.10% mark in mid-morning before closing at 3.11%, down three basis points from Monday.
The two-year yield rose half a basis point to 0.525%, while the 30-year yield declined five basis points to 4.22%.
Coupled with light issuance — new-supply is roughly half of last year’s levels — falling Treasury rates have helped tax-exempt prices remain steady or rise for the past 26 consecutive sessions.
Uncertainty as to how far this rally can go was evident in the latest weekly survey of traders from MMD. Four-fifths of all traders surveyed had neutral outlooks for this week, while as of Friday 7% were bearish and 13% were bullish.
For the coming one to two months, three-fifths were neutral while 27% were bearish and 13% were bullish.
The survey also reveals just how unexpected the ongoing rally has been: In six of the past nine weeks, precisely zero traders surveyed indicated they were bullish on the market on the one-to-two month horizon. Analytical commentary has been upbeat recently.
“Demand has been robust and may be increasing as we enter the strong summer reinvestment period,” Janney Capital Markets’ Alan Schankel wrote Tuesday. He said issuance could pick up to $20 billion in May, versus an average of roughly $15 billion in the previous four months. But the market can easily absorb this as it approaches the strongest redemption period of the year.
“This will be dwarfed by the $50 billion available for reinvestment,” Schankel said. “The demand side of the scale will outweigh supply in coming weeks.”
MMD analyst Daniel Berger added that earlier panic and fear “created by some prominent naysayers has largely dissipated [and] retail investors now understand that financial stress will not immediately lead to the inability to pay principal and interest when due.”
He noted the 10-year muni-Treasury ratio, which dropped to 83% Tuesday from 91.6% a month ago, could still find room to rally towards its two-year low of 74.6%, from Sept. 23, 2009.
Berger cited “diminishing concern about widespread imminent municipal defaults, light new-issue supply and a typically heavy period of seasonal reinvestment.”
The five-year MCDX index, a standard index for muni credit-default swaps, clearly supports the analysts. It has tightened as much as 120 basis points in the calendar year, finishing Monday at 125.8, down from 235.9 on Jan. 7 and roughly 50 points below its two-year average. Last week it closed at 115.6, its lowest since October 2009.