Yields Balloon on Wings of European News

Tax-exempt yields soared as demand for safe-haven assets fell on positive news coming from Europe.

Muni yields were up across the curve Thursday, following Treasuries, easily reversing Wednesday’s gains. Yields were up between one and eight basis points, according to the Municipal Market Data scale.

“Munis followed Treasuries all day long,” a trader in New York said. “It was nothing out of the ordinary. Munis were down five to 10 basis points across the curve — just like what happened in Treasuries.”

The two-year yield was up one basis point, followed by a two-basis-point jump in the three- to five-year range. Yields on credits maturing in 2018 and 2019 jumped six basis points, and credits on the long end of the curve spiked up seven and eight basis points.

On Thursday, the two-year muni yield closed up one basis point at 0.46%, after holding steady at 0.45% for 10 consecutive sessions. The 10-year muni yield was up seven basis points to close at 2.46%.

The 30-year muni yield finished eight basis points higher at 3.80%.

By Thursday’s close, the Treasury sell-off switched to high gear as yields were up across the curve. The two-year yield was up two basis points to 0.32%. The 10-year yield closed up 18 basis points at 2.39%, and the 30-year yield jumped up 20 basis points, finishing at 3.43%.

Stocks led the risk-on trade as all major indexes were up around 3%. The Dow Jones Industrial Average ended Thursday up 339.44 points, or 2.86%, to finish at 12,208.48.

“The bond market was under assault as investors flocked to risk assets and dumped Treasury bonds,” MMD analyst Randy Smolik said in a research note. “Muni sellers were reluctant to reverse course in the early going after several days of steady to firmer trading activity.”

As Thursday progressed, the municipal market continued to weaken. By early afternoon trading, muni yields were creeping up two basis points on the short end and up to seven basis points on the long end. Yields in the belly of the curve crept up between three and six basis points by early afternoon.

“There is a little bit of softening as people trying to get some trades done, but we are still obviously having a supply issue,” a second trader in New York said. “There are more offerings than there have been in the past few weeks, and people are cutting the offerings, which is helping.”

“Blocks are trading, but it’s very targeted and very specific,” a Chicago trader in said. “Once you get into individual investors or privately managed accounts that have cash sitting around, they are hesitant to put money to work. And following that channel, traders are not interested in building a position.”

Some analysts said the market’s tone was weaker Thursday because of several high-quality deals expected to come next week. “Next week’s array of high-grade sales and a dead-cat bounce in Treasuries was weakening the muni market tone,” Smolik said in a research note.

Muni-to-Treasury ratios continue to fall lower as the “flight-to-safety Treasury trade” of the past several weeks reversed course, he said.

Bank of America Merrill Lynch priced $101.7 million of Oregon general obligation refunding bonds in three series. The bonds are rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.

Yields on the first series, $60 million of Oregon opportunity bonds, ranged from 1.12% with a 3% coupon in 2015 to 2.87% with a 5% coupon in 2023. The bonds are callable at par in 2021.

Yields on the second series, $36.3 million of debt for various-projects, ranged from 0.73% with a 2.5% coupon in 2014 to 3.63% with a 3.5% coupon in 2028. The bonds are callable at par in 2021.

In the third series, $5.5 million of various-project debt, yields ranged from 0.5% with a 2.5% coupon in 2013 to 3.63% with a 3.5% coupon in 2028. The credits are callable at par in 2021.

Issuers who took advantage of the falling yield environment Wednesday and pushed deals up a day early were pleased on Thursday when municipal yields rose.

The Massachusetts School Building Authority was expected to come to market Thursday and pushed retail and institutional pricing up to Wednesday due to favorable market conditions, said Katherine Craven, executive director of the MSBA. The deal was also upsized to $1 billion from $600 million.

“We were very satisfied and pleased to see the reception our bonds got in the market,” Craven said Thursday. “We were more aggressive Wednesday when we saw opportunities in the market.”

Europe has been dominating the news this week, and that trend continued Thursday with the announcement that European leaders came to an agreement with private banks to take a 50% haircut on Greek debt.

But positive U.S. news contributed to the risk-on trade. Real gross domestic product expanded 2.5% in the third quarter, as expected, up from a 1.3% increase in the second quarter, according to the Commerce Department. That’s the biggest expansion since the third quarter of last year.

Personal consumption expenditures increased 2.4%, the highest since the third quarter 2006, and a big jump from the 0.7% gain reported for the second quarter.

State unemployment benefit claims fell 2,000 to 402,000 for the week of Oct. 22, slightly below expectations.

-- This article first appeared on The Bond Buyer.

 

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