The tax-exempt market turned to the primary market for direction Tuesday as traders looked to see how this week's balance of supply and demand would play out.
Many of the week's deals started to price Tuesday and underwriters were able to lower yields in repricings.
Barclays Capital priced for retail $420 million of California State University Trustees system-wide revenue bonds, rated Aa2 by Moody's Investors Service and A-plus by Standard & Poor's.
Yields ranged from 0.24% with a 2% coupon in 2013 to 3.85% with a 3.75% coupon in 2042. Bonds maturing in 2026, in between 2028 and 2031, and in 2037 were not offered for retail. The bonds are callable at par in 2022.
Morgan Stanley priced for institutions $350 million of Fairfax County, Va., Industrial Development Authority health care revenue bonds for the Inova Health System. The bonds are rated Aa2 by Moody's and AA-plus by Standard & Poor's.
Yields on the first series of $290 million ranged from 0.38% with a 3% coupon in 2014 to 4.03% with a 4% coupon in 2042. Bonds maturing in 2013 were not formally re-offered. The bonds are callable at par in 2022. Yields were lowered as much as 15 basis points from the retail order period.
Bonds on the second series of $60 million yielded 2.46% with 3%, 4%, and 5% coupons in a split 2022 maturity. Yields were lowered 11 basis points from retail pricing.
Ziegler Capital Markets sold $311 million of Kansas Development Finance Authority hospital revenue bonds for the Adventist Health System/Sunbelt Obligated Group, rated Aa3 by Moody's, AA-minus by Standard & Poor's and AA by Fitch Ratings. Pricing information was not available by press time.
Indeed, traders looked to deals in the primary market to get a sense of the supply and demand balance as August 1 reinvestment money is expected to hit the market.
"Munis are off to a slow start," a New York trader said. "There are too many deals this week. But we've been so busy the last couple weeks that it could just be a breather."
He added people were watching many of the smaller deals that priced in the negotiated market to determine the market's strength.
Outside the primary market, the overall tone was steady, according to the Municipal Market Data scale. On Tuesday, the 10-year tax-exempt yield held steady at 1.66%, hovering above its record low of 1.60% set July 26. The 30-year muni yield finished flat at 2.84%, five basis points above its record low of 2.79% set July 25. The two-year was steady at 0.29% for the fourth consecutive session.
Treasuries were choppy but ended the day stronger. The benchmark 10-year yield fell two basis points to 1.48%. The two-year and 30-year yields dropped one basis point each to 0.22% and 2.56%, respectively.
In the secondary market, trades compiled by data provider Markit showed mostly weakening. Yields on Cypress Fairbanks, Texas, Independent School District 5s of 2026 jumped six basis points to 1.27%.
Yields on New York City Municipal Water Finance Authority 5.724s of 2042 increased three basis points to 3.69% while yields on Puerto Rico Sales Tax Financing Corp. 5.5s of 2037 rose two basis points to 4.18%.
To be sure, other trades were stronger. Yields on Houston 5.25s of 2027 fell three basis points to 1.81% while New Jersey's Casino Reinvestment Development Authority 5.46s of 2025 fell two basis points to 5.45%.
Looking back over the month of July, muni to Treasury ratios have fallen as munis outperformed their taxable counterparts and became comparatively more expensive. The five-year muni yield to Treasury yield ratio fell to 110.2% on Tuesday from 116.4% on July 2. The 10-year ratio dropped to 112.2% from 117.1% at the beginning of July. The 30-year ratio fell to 110.9% on July 31 from 117.5% at the start of the month.
Throughout July, the slope of the yield curve flattened as demand outweighed supply. The one- to 30-year slope of the curve flattened to 265 basis points on July 31 from 296 basis points on July 2. The one- to 10-year slope of the curve flattened to 147 basis points from 165 basis points at the beginning of the month.
Credit spreads compressed throughout the month on the short and long end but widened in the intermediate part of the curve. The five-year triple-A to single-A spread compressed to 61 basis points on July 31 from 66 basis points on July 2. The 30-year spread compressed to 73 basis points from 80 basis points at the beginning of the month.
The 10-year triple-A to single-A spread widened throughout the month as supply outweighed demand and investors moved to other parts of the curve. The 10-year spread widened to 83 basis points from 79 basis points at the start of the month.
Despite this flattening, John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney, still thinks there is value to be found. "We continue to advocate exposure to A-rated securities, as spreads on these securities are currently trading in excess of their long-term historical average, though further spread tightening may be suspended or mildly reversed in the near term."
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