The municipal market's performance was swayed by the economic data released this week.
On Tuesday municipal bonds followed Treasuries and started selling off after a bullish report on manufacturing from Institute for Supply Management. Municipal bond yields didn't rise as much as treasuries did, but the sell-off lasted most of the week and by market close on Thursday the 30-year had risen eight basis points to 3.29% and the 10-year by five basis points to 2.13% from Aug. 29, according to Municipal Market Data.
The sell-off affected the pricing of some of the deals sold in the primary on Wednesday, most notably in the $99.68 million La Porte Independent School District unlimited tax school building bonds priced by FirstSouthwest. A source with knowledge of the deal told The Bond Buyer in an interview that during the deal's premarketing, the deal team planned to put a 5% coupon on the long maturities. The sell-off caused the team to reconsider and put 4% coupons on the long maturities.
The markets' anxiety about the sell-off abated on Thursday, with traders calling the municipal market's reaction to the yield hike in Treasuries "overblown." Two deals that came to market -- $337.3 million of Los Angeles Harbor Department revenue and refunding bonds and $122 million of San Mateo County Community College District general obligation refunding bonds -- were priced with 5% coupons on their long maturities.
Traders said the L.A. Harbor deal demonstrated the market's belief the selloff would not continue, because one of its three tranches was subject to the alternative minimum tax. A trader in New York said this meant the bonds from that section were marketed to institutional buyers rather than both institutional and retail. Retail buyers typically boost California deals' successes because California's high taxes make tax-free investments incredibly attractive.
The fact the bonds that were only marketed to a limited part of the market had 5% coupons on them showed that the issuer and deal team were confident that there would be buyers and that the sale would not be affected by muni yields rising, the trader in New York said.
All three of the deals did well, according to traders.
Another deal that grabbed investors' attention in the primary market was the three-part $226.6 million Metropolitan Transportation Authority transportation revenue bond sale. The deal attracted investors because the bonds were variable rate bonds, and variable rate issuance has been low all year.
The volume of both short and long variable rate issuance totaled $10.2 billion as of August 30, compared to $185.14 billion fixed rate issuance during the same period, according to data provided by The Bond Buyer and Ipreo.
Dan Heckman, senior fixed income strategist at U.S. Bank, told The Bond Buyer in an interview that the timing of the deal was very good because it offered investors a way to hedge against potential interest rate increases, which is important at this time because the Federal Reserve has discussed possibly raising interest rates in 2015.
Two long tobacco bonds were the most actively traded securities in the secondary market at the beginning of the week, according to data compiled by Markit. One of the bonds, the Golden State Tobacco Securitization Corporation's California tobacco settlement finance revenue 5.75s of 2047,were trading between a low of 7% and a high of 7.22% on Friday, according EMMA. They were trading between 7.25% and 7.27% on Wednesday, 63 to 36 basis points below the 7.63% they were trading on August 21.
The other actively traded long tobacco bond the New Jersey Tobacco 5s of 2041 that were trading between a low of 7.03% and a high of 7.21% on Friday, between 36 to 18 basis points lower than they were trading on August 21.
Traders said that the tobacco bonds were trading so much because crossover buyers who had bought the bonds a couple months ago realized wanted to sell the bonds while they were still trading at attractive levels. The traders said the mutual funds that were selling the tobacco bonds were probably using the cash to buy higher rated securities.
They said the trades were going well because yield is so scarce in the current market environment that there will always be buyers for the high yielding tobacco bonds.
The municipal market stabilizied slightly from its sell-off this week on Friday after the employment situation report showed a weak payroll number.
The report showed that payrolls in August rose only 142,000 when the market had been expecting a 230,000 increase. Private payrolls increased by 134,000, lower than analysts' forecast that they would climb between 187,000 and 270,000.
Municipal bond yields strengthened after the weak employment situation report was released, boosting the belief the market is reacting more to the economic numbers published, investors said.
After the report came out yields on bonds maturing from 12 to 30 years fell by one basis point, according to Municipal Market Data's triple-A scale.
The two, 10 and 30-year all held steady at 0.30%, 2.13% and 3.29% respectively, according to MMA's data.
"The market is reacting more and more to the economic data coming out," a second trader in New York said. "It will be interesting to see what happens when more data is released next week."
A retail sales report is scheduled to come out next Friday.
"If the market keeps reacting this dramatically to data, that has potential to shake things up," a trader in Chicago said.
Issuance is scheduled to pick up next week to total $3.1 billion, up from $1.76 billion this week, according to data compiled by The Bond Buyer and Ipreo.
Treasuries were mixed on Friday with the 30-year rising by two basis points to 3.23%, and the 10-year increasing by one basis point to 2.46%. The two-year note declined by three basis points to 0.51%.
