The municipal market showed its strength Thursday by absorbing the bulk of a big week of new issuance with only a slight impact on yields.
And the fact that yields from the belly of the curve onward rose on the day had little to do with the week’s hefty supply of new deals, a trader in New York said.
“We’re reflecting what’s happening in the Treasuries,” he said. “We’re reflecting the greater possibility of going through this debt ceiling on the books in the next few days.”
Munis ended the day higher across all but the front of the curve, according to the Municipal Market Data scale. Maturities from 2012 to 2017 were flat. Those from 2018 through 2035 rose one or two basis points. Maturities at the far end of the curve increased three basis points.
The benchmark 10-year tax-exempt yield rose after holding steady for seven straight trading sessions. It climbed two basis points to 2.68%.
The 30-year yield also weakened, rising three basis points on the day to 4.35%. The two-year yield held at 0.40% for an eighth consecutive session, its low for the year.
Treasury yields rose across the curve Thursday. The 10-year yield jumped seven basis points to 3.01%, a barrier it hasn’t crossed in the eight previous trading sessions dating back to July 8.
The 30-year yield climbed five basis points to 4.31%, after rising eight basis points Wednesday. It has fully reversed its 13 basis point drop from late Tuesday afternoon. The two-year yield skipped up two basis point to 0.40%.
This week, new issuance has been the story. When all is said and done, it is expected to total $8.27 billion, against a revised $5.71 billion last week. If it comes to pass, it would total the largest volume for new debt offerings this year.
Competitive deals dominated the primary market Thursday. Bank of America Merrill Lynch led the way when they won $613.4 million of San Francisco Public Utilities Commission water revenue bonds. The bonds were rated Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s.
Yields range from 2.80% with a 5.00% coupon in 2020 to 4.79% with a 4.50% coupon in 2038. Debt maturing in 2032 though 2034, 2036, 2037, and 2041 was sold but not available.
“There weren’t a lot of pre-set orders, but the price at which [Bank of America Merrill Lynch] bought it seemed fair,” a trader in California said of the San Francisco utility deal. “People are realizing it’s a pretty good credit, and it’s at a reasonable spread. It’ll take a while, but it should clean up.”
JPMorgan won $266.4 million of Los Angeles general obligation refunding bonds. The bonds were rated Aa3 by Moody’s and AA-minus by Standard & Poor’s.
Yields were not available at press time. But the trader in California said they were less favorable than those for the San Francisco utility’s issue.
“Los Angeles came out and seemed a little aggressive,” he said. “The city of L.A. had its financial difficulties only a few months ago. I’d rather buy the utility than the city. It came at a narrower spread than the utility. That one may move a little slower.”
Bank of America Merrill also participated in one of the largest new deals for the day on the negotiated side. The bank priced $280 million of Connecticut GO bonds. They were rated Aa2 by Moody’s and AA by Standard and Poor’s and Fitch Ratings.
The credits were priced to the SIFMA swap index in a range from plus-70 basis points in 2016 to plus-120 basis points in 2018.
The crisis over the country nearing its debt ceiling has so far affected the muni market to different degrees. For one, should the United States be downgraded from its select triple-A status, the effect on muni bond funds would not be significant, Vikram Rai, an analyst in Citi’s fixed-income research group, wrote in a recent strategy note.
Most muni funds limit concentration risk along the rating scale of investment-grade securities, according to Rai. That means a high-grade, tax-exempt portfolio might hold, for example, 20% of its assets in triple-A securities, 40% in double-A-plus securities, and 40% in double-A securities.
“We note, however, that portfolio mandates can change,” Rai wrote. “Still, Treasuries would be the benchmark, and deployment out of tax-exempts due to the correlated downgrade should be muted.”
But the U.S. debt-ceiling crisis has had a definite effect on states with triple-A ratings. This is particularly true since Tuesday, when Moody’s placed on review for possible downgrade the Aaa ratings of Maryland, New Mexico, South Carolina, Tennessee, and Virginia. The move followed its July 13 action placing the Aaa government bond rating of the United States on review for downgrade.
But Maryland Treasurer Nancy Kopp took Moody’s move as incentive to rethink its new issuance schedule. Kopp decided to compress the retail part of a negotiated deal that had been slated to take place on both Friday and next Monday and do it all on Monday.
Doing so would give Washington time to make progress on a solution to reaching the debt ceiling, as well as give Maryland time to digest the Moody’s move and gauge its impact, Kopp said.
“I don’t think at this point it will have any significant impact on the sale,” she said in an e-mail. “Most of the retail is usually sold out in the first day, anyhow. The competitive sale — about $400 million — will proceed as planned on Wednesday.”