Yields in the municipal market were dramatically firmer Wednesday amid light to moderate activity in the secondary market.
“We were firmer through the list,” a trader in New York said. “There was no run-up among high-grades against the others; they seem to have moved along with it.”
Munis were playing a game of catch-up following a two-day rally among Treasuries, he added, noting that Treasuries gave up some of the gains in the final hours of the session.
Despite the low interest rates offered, new issues were finding plenty of buyers as traders scrambled for new paper, a trader in New Jersey said.
In the new-issue market today, Morgan Stanley priced $462.8 million of state transportation refunding revenue bonds for the New Mexico Finance Authority.
The tax-exempt bonds, rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s, ranged from 0.50% in 2012 to 3.05% in 2024. High demand pushed those yields down from an earlier preliminary pricing when they ranged from 0.60% to 3.10%.
The New York trader said the 10 basis point drop on the short end is a reflection of tremendous demand.
“People may be preferring to put cash in the short-term market where at least there’s some return rather than put it in a sock or under the mattress,” he said. “They want certainty that they will get their money back two years from now.”
The New Jersey trader said there is just not enough paper right now.
“We’ll see whether the new-issue side of the business can correct that,” he said, “but anything I see coming in is, for the most part, getting gobbled up.”
Goldman, Sachs & Co. priced $617.39 million of highway improvement Build America Bonds for the Texas Transportation Commission.
A source at Goldman said pricing would be released Thursday. A preliminary pricing wire said the 2019 bonds would offer a spread of 65 to 70 basis points over Treasuries, while 2025 bonds would offer a spread of 100 to 105 basis points.
The average life of the offering will be 13.15 years, compared with an average life span for BABs of almost 30 years.
A trader indicated that index funds, which have had few opportunities to purchase BABs at the intermediate range, could mop up the bonds, which are rated triple-A by all three major rating agencies.
“They are putting away all these BAB issues like there is no tomorrow,” a retail-oriented trader in San Diego said, noting that his firm was unable to coordinate with larger banks to distribute BABs simply because it’s so easy to sell them.
“You’d have to see these issues come out in the billions before they start inviting people in,” he said.
The Texas transportation deal is part of a larger issue exceeding $1 billion. JPMorgan is leading the tax-exempt portion of the deal and will price it for institutions Thursday. The retail period Wednesday offered yields from 2% in 2011 to 5% in 2017.
The Municipal Market Data triple-A scale yielded 2.33% in 10 years on Wednesday, or six basis points lower than Tuesday’s close, while the 20-year scale yielded 3.29%, or four basis points lower than Tuesday. The scale for 30 year debt shed four basis points to drop to 3.70%.
The strengthening builds on smaller gains Tuesday. The two-day rally marks a reversal of the trend that marked the prior three weeks, in which muni yields rose from a series of record lows in late August.
Yields on the 10-year and 30-year triple-A scale bottomed out at 2.17% and 3.67%, respectively, on Aug. 25. The 20-year low of 3.28% was set Aug. 31.
Treasuries continued to rally in the intermediate and long end of the curve after broad gains Tuesday.
The benchmark 10-year note finished Wednesday at 2.56%, two basis points lower than the prior close at 2.58%. That follows a 13 basis point strengthening on Tuesday and puts it closer to the calendar year low of 2.47% recorded at the start of this month.
The 30-year bond closed the session at 3.75%, or four basis points lower than Tuesday’s close at 3.79%. Its 52-week low of 3.51% was set Aug. 26.
Pressure on the short-end was less pronounced. The two-year note yielded 0.44% late Wednesday, a basis point higher than on Tuesday. It yielded a record low 0.416% in intraday trading Tuesday afternoon.
Appetite for Treasuries began strengthening after the Federal Reserve indicated Tuesday in its monetary policy statement that the economic recovery would be “modest” while inflation would likely remain “subdued.” The central bank suggested further quantitative easing could be possible if conditions warrant — a step that could further reduce interest rates, thereby making Treasuries more attractive.
“The story here is the Fed has become progressively more concerned about deflation risks over the past four months,” said a fixed-income strategist in Philadelphia. “If you take that to its natural conclusion, it speaks to a potential asset purchase program because of price fears in early 2011.”
Other safe haven assets also saw a boost. Gold prices rose for a fifth straight day Wednesday to nearly $1,300 per ounce, a nominal record high, according to Thomson Reuters.