Municipal bond yields firmed as much as three basis points Tuesday as appetite for safe assets was robust enough for one issuer to move an institutional pricing up a session to Tuesday.
“The market is a little bit firmer, a little bit stronger,” a trader in New York said.
“People are recognizing where the ratios are, where the long ratio is,” another trader in New York said. “That drew in demand. And the fact that we just hung in there.”
The 30-year muni offered 105.5% of comparable Treasuries on Tuesday, while the 10-year offered 92.6%.
The risk-averse attitude was prompted by news that Japan’s energy experts were comparing the recent nuclear crisis with the Chernobyl disaster in 1986.
“The severity level at the crippled Japanese plant has been raised from 5 to 7, meaning it’s now considered a 'major accident’ with 'wider consequences,’” the Associated Press reported. “Radiation leaks have affected much of the region’s air, water, and food.”
A flight to quality promptly ensued on the news, sending Treasury yields as much as nine basis points lower. The Dow Jones industrial average finished 117.5 points lower, almost a full percentage point lower.
Munis benefited most from the flight in the belly of the curve.
Nine-to-11-year tax-exempts firmed three basis points, according to Municipal Market Data’s triple-A scale. Short-term yields firmed a single basis point, and all maturities 12 years and beyond firmed two basis points.
The strength reverses the trend of the past few weeks. The benchmark 10-year yield climbed as much as 37 basis points from a recent low of 2.90% on March 16. It settled at 3.24% Tuesday.
But the flight to quality is likely a temporarily event, hardly curing the municipal market of its twin ailments — shallow supply and insecure demand.
“We’ve got just enough buyers,” the second New York trader said. “But one thing you have to worry about in this environment is, what would happen if it suddenly got loaded with heavy new supply? It’s difficult to guess one way or the other.”
While cash flowed out of equities and into fixed-income assets, retail appetite for new issues in the muni market was robust.
JPMorgan’s retail pricing for Fordham University performed so well that Wednesday’s institutional pricing was bumped forward to Tuesday.
A source at the underwriter declined to say how much was sold to retail, but JPMorgan was able to reprice yields for the institutional offering.
The $145.8 million issue of revenue bonds was priced through the Dormitory Authority of the State of New York and rated A2 by Moody’s Investors Service and A by Standard & Poor’s.
Yields in the institutional pricing ranged from 2.30% in 2015 — five basis points lower than the retail pricing — to 5.35% to 2031, which was four basis points lower. An institutional-only offering for 2036 maturities offered 5.63%.
Jefferies & Co.’s retail pricing for New York’s Metropolitan Transportation Authority was also digested easily. The deal was for $297.3 million of dedicated tax fund bonds, rated AA by Standard & Poor’s and AA-minus by Fitch Ratings.
“We’re off to a good start,” said Roy Carlberg, managing director at Jefferies’ underwriting desk.
Yields ranged from 3.65% in 2019 to 4.80% in 2028.
New York paper may have done particularly well in light of the Liberty Development Corp. postponing what was expected to be a $900 million offering this week.
“We’re still getting big numbers for product, seeing a lot of product going away,” the first New York trader said. “Overall, it certainly seems like very tight bidding for new issues, even in the competitive market. We’re putting forth some very aggressive numbers and seeing that clean out pretty well.”
Traders in other areas described the market as steady or mixed.
“I haven’t seen [the flight to quality] translate over to municipals yet,” a trader in California said. “I’m not so sure that it’s going to.”
The Treasury rally hit all points of the curve. The two-year note finished six points lower at 0.77%, the 10-year yield fell eight basis points to 3.50%, and the 30-year declined eight basis points to 4.57%.
A muni trader in New York said that broad weakening helped put the spotlight on how attractive high-grade municipal bonds are these days.
The two-year muni-to-Treasury ratio jumped to 90.7% Tuesday, up from 82.9% a day before.
Fresh economic data contributed to the risk aversion. February’s trade deficit narrowed to just $45.8 billion, from $47 billion a month before. The figure was disappointing compared with the Street’s estimate of $44 billion, and the deficits aren’t anticipated to narrow in the months ahead as oil prices have skyrocketed 30% in the past six weeks.
“The real trade balance was much worse than anticipated, suggesting further downside risk to Q1 GDP growth,” wrote the economics team at Nomura Global Economics, which chopped their U.S. growth forecast for the quarter down 0.3 percentage points to 2.1%.
The Treasury’s budget deficit came in near forecasts at $189 billion for March. For the first six months of the fiscal year, the federal government has spent $829.4 billion more than it has taken in.
Finally, optimism among small businesses fell 2.8 points in March to 91.9, its lowest since October, according to the National Federation of Independent Business.
“Rising energy and commodity prices are pushing them to increase their prices at a time when demand for their goods and services is not very robust,” wrote Chris Christopher, senior principal economist at IHS Global Insight.