The “magic” 5% tax-free yield is sustaining strong demand from retail investors.
Experts agree that municipals offer high yields relative to Treasury bonds even though interest rates in general have been falling amid a paltry supply of new tax-exempt debt.
“Tax-free municipal yields, on a comparative basis, are screaming to be purchased,” said Bill Mason, senior vice president of trading and underwriting at David Lerner & Associates in Syosset, N.Y. “While past history has shown us that municipals typically trade at 80% of Treasuries, today they are trading cheaper.”
As of Tuesday, 30-year triple-A municipal bonds were yielding 102.53% of comparable Treasuries, according to Municipal Market Data.
Even though benchmark yields have fallen to historic lows not seen since November 2010, market experts said retail investors have taken advantage of the rare window of opportunity to earn 5% and even 6% yields on a select few new issues. The offerings include the $1 billion Chicago financing for O’Hare International Airport and the $600 million New Jersey Transportation Trust Fund Authority sale.
The pricing of Chicago’s third-lien revenue bonds was pushed up by one day and its relatively attractive yields were snapped up by supply-hungry bond buyers.
The deal’s $423 million of Series A bonds contained a final 2039 maturity that carried a 5.75% coupon priced to yield 6% — 126 basis points higher than the generic triple-A general obligation bond in 2041 at the time of the pricing, according to MMD.
Sources say bonds at relatively attractive yields continue to drum up demand among yield-hungry mom-and-pop investors, even though those deals were priced over two weeks ago.
“We are still seeing strong demand from our retail investors at the 5% or better yields,” said Sam Ramirez, chief executive officer at Ramirez & Co. in New York.
The O’Hare International Airport deal — the largest tax-exempt issuance so far this year — was priced on April 19 in a week that saw $3.53 billion of new volume, and as tax-exempt yields fell for the 10th consecutive day.
The bonds were rated A1 by Moody’s Investors Service and A-minus by Standard & Poor’s and Fitch Ratings.
A day earlier, the benchmark 10-year muni yield ended at 2.92%, a 35 basis point drop compared to April 11 when the rally began.
“With the recent rally, due to improving fundamentals and the lack of supply, we have seen a slight decrease in demand. However, there still is considerable demand at those magic 5% and 6% yields,” Ramirez said.
The New Jersey deal, meanwhile, entered the market on May 3 — a day earlier than expected due to the heavy demand during the retail order period — as the market continued to rally.
Yields in the institutional period ranged from 1.51% in 2013 to 5.47% in 2041, after being cut across the curve from five to 13 basis points compared to the retail period.
The yield in 2041 was 91 basis points higher than the generic triple-A GO bond at the time of the pricing, according to MMD.
Traders said the deal was easily digested because of little competition in the primary.
It was rated A1 by Moody’s, A-plus by Standard & Poor’s, and AA-minus by Fitch.
Such wide spreads should sustain the attractive yields preferred by retail, according to Chris Mier, chief strategist at Loop Capital Markets.
“Spreads remain quite wide, so attractive yields should still be available on general market issues, unless yields continue to drop,” he said.
Ramirez agreed: “On a relative value basis, municipal bonds offer great returns and we feel the fundamentals of the market will continue to improve and spreads versus Treasuries will eventually return to historic norms.”
Individual investors have been holding down the fort in the muni market in the relative absence of large institutional investors since the taxable Build America Bond program concluded at the end of 2010.
Retail investors have been buyers of individual bonds despite pulling billions of dollars from municipal bond funds in recent weeks, according to experts. Fund outflows peaked when $4 billion exited in the week ended Jan. 19, according to Lipper FMI.
“Municipal bond funds have been raising cash to meet redemptions as some money finds its way into stocks and commodities, and this is creating opportunities for retail investors who are benefiting from higher yields,” said Rick Calhoun, a retail broker at Crews & Associates in Little Rock.
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