Munis Post Gains Despite Slower Trading

The tax-exempt market posted gains for a sixth straight trading session Tuesday as demand outweighed supply in the muni market this week, and yields followed Treasuries lower.

The municipal bond market showed signs of strengthening in the morning, but started to turn quiet by the afternoon.

A Chicago trader said he completed trades in the morning that were a little bit stronger, but cautioned against trying to force anything to get done.

"I've had a couple of trades but if you try to force it you're not going to get rewarded," the Chicago trader said. "So I think it's an order-driven business that's coming in and that's great if you can get something coming your way. But you can't force it to happen today."

"If you're trying to push stuff in you're getting a different reception than if someone comes to you and bids you down a few basis points from yesterday," he added. "Forcing action is unsuccessful."

Others traders agreed that due to slim primary issuance this week, the secondary stole focus and provided direction.

One New York trader said there was buying in the market and the overall tone felt stronger. "There is no primary so we are a little busy in the secondary," he said. "There is some buying and it's a bit stronger."

And while it is a fairly quiet week, all eyes continue to look ahead to Friday for the Fed's annual symposium at Jackson Hole, Wyo. "All of the headlines have varying degrees of impact and anything that is going to cause jobs or housing ultimately to change course will impact us," the Chicago trader said.

In the primary market, most of the week's largest deals were priced Tuesday, although only one topped $100 million. Bank of America Merrill Lynch priced $108 million of triple-A rated Columbus, Ohio general obligation refunding bonds, following a retail order period Monday. The taxable portion was also priced Monday.

Yields on the first series, $77.4 million of various purpose unlimited tax refunding bonds, ranged from 0.20% with a 2.5% coupon in 2013 to 2.30% with a 5% coupon in 2026. The bonds are callable at par in 2023.

Yields on the second series, $30.6 million of various purpose limited tax refunding bonds, ranged from 0.20% with a 2.5% coupon in 2013 to 2.70% with a 3% coupon in 2026. The bonds are callable at par in 2023.

Piper Jaffray & Co. priced $90 million of California's Ohlone Community College GO refunding bonds, rated Aa2 by Moody's Investors Service and AA by Standard & Poor's. Pricing details were not yet available.

In the secondary market, trades compiled by data provider Markit showed firming.

Yields on Ohio's Buckeye Tobacco Settlement Financing Authority 5.875s of 2030 sank six basis points to 7.64%.

Yields on Dallas, Texas, 5s of 2020 and Northgate Crossing, Texas, Municipal Utility District 4s of 2029 fell three basis points each to 1.59% and 3.48%, respectively.

Yields on New York City Transitional Finance Authority 5s of 2028 dropped two basis points to 2.55%, while Minnesota 3s of 2030 fell one basis point to 3.13%.

On Tuesday, the 10-year Municipal Market Data yield fell one basis point to 1.75%. The 30-year finished steady at 2.90% while the two-year closed at 0.29% for the 24th consecutive session.

Since the most recent muni rally began on Aug. 21, the 10-year yield has plummeted 15 basis points while the 30-year yield has plunged 12 basis points, pushing yields down to levels not seen since early August.

The 10-year MMD yield is now trading 15 basis points above its record low of 1.60% set July 26 and the 30-year yield is hovering 11 basis points above the 2.79% record low set July 25.

Treasuries posted gains for the second straight trading session. The benchmark 10-year yield and the 30-year yield fell one basis point each to 1.64% and 2.75%, respectively. The two-year was steady at 0.28%.

Over the course of August, the slope of the yield curve has steepened as munis weakened across the curve for most of the month. On Tuesday, the one- to 30-year slope steepened to 270 basis points from 266 basis points at the beginning of August. Similarly, the one- to 10-year portion of the curve steepened to 155 basis points from 147 basis points at the start of the month.

But over the course of the year, it is clear that investors have moved out in duration to pick up extra yield and that demand has generally outweighed supply. Since Jan. 3, the one- to 30-year slope has flattened to 270 basis points from 332 basis points. The one- to 10-year slope has flattened to 155 basis points from 163 basis points at the beginning of the year.

Credit spreads also show investors have continued to move down the credit scale in search for yield, even despite negative headlines of bankruptcies and the early-August sell off. The five-year triple-A to single-A MMD spread compressed to 53 basis points on Tuesday from 61 basis points on August 1. The spread has come in much more since the beginning of the year when it started at 82 basis points.

The 10-year triple-A to single-A spread compressed by over 30 basis points this year. On Tuesday the spread finished at 71 basis points, down from 83 basis points at the beginning of August and down from 96 basis points at the start of the year.

The 30-year spread didn't drop quite as much, but still fell. On Tuesday, the spread closed down to 71 basis points from 73 basis points on Aug. 1 and from 89 basis points on Jan. 3.

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