Municipal bonds weakened just a sniff Thursday as the market absorbed a fairly hefty slate of new state and local government debt.
Munis have tread water all week as the market digests heavy supply in the primary market. Coming into the week, municipal governments were scheduled to float $8 billion of bonds. With nominal yields still very low and the market awaiting heavier supply in the coming weeks, buyers and sellers appear to be at an impasse.
“Everyone is just kind of sitting on their hands, and they have been for the last month or two,” said a trader on the West Coast. “These past several weeks have been all the same; it’s like pulling teeth.”
The trader called Thursday “pretty much a non-event.”
Yields hit a generational low in the late summer at the crest of a powerful rally, with the benchmark triple-A 10-year muni yield bottoming at 2.17% on Aug. 25. Yields then backed off about 20 basis points in early September, and have all but stalled since then. The 10-year closed Thursday at 2.37%, up one basis point. That’s the only movement on the 10-year all week.
“Munis have basically been directionless,” Thomson Reuters analyst Randy Smolik wrote in his daily commentary. “The muni market almost feels like it is in a stalemate mode.”
That stalemate reflects high ratios to Treasures as a counterweight to low nominal yields, Smolik said. The former attracts investors, while the latter repulses them. He called this week “one of the most lackluster and boring sessions of the year.”
Duane McCalister, who co-manages a $420 million intermediate tax-free fund for Marshall Funds, said he does not read too much into last month’s mini-sell-off.
The cash flows into municipal bond funds began to slow down in mid-August, and supply rejuvenated after a lull. According to Bloomberg LP, municipalities sold $2.5 billion or less per week in tax-exempt bonds over two weeks in late August and early September. As supply picked up, he said it was only natural to see rates drift up.
Neither supply patterns nor the slowdown in fund flows disrupts the “gravitational pull” that expectations of quantitative easing by the Federal Reserve and abnormally low Treasury yields are exerting on municipal rates, McCalister said. The yield on the benchmark 10-year Treasury note bumped up six basis points on Thursday, to 2.55%. It is still only about 40 basis points above its nadir in 2008.
The bond market is still in a “secular demand for income environment,” McCalister said, and he would not be surprised if municipal rates legged back down.
“I don’t think this is the start of a major downdraft trend,” he said. “It’s more of a buyer’s market at this point.” At 93%, the ratio of the 10-year triple-A yield to the 10-year Treasury yield suggests municipals are cheap by historical standards.
McCalister said his fund’s cash position is a little higher than usual right now, to keep “powder dry” for opportunity he expects to surface in the next month or two.
The iShares S&P National AMT-Free Municipal Bond Fund, with $2.23 billion the biggest municipal exchange-traded fund, rose 5 cents to $106.27. The ETF provides a theoretical real-time proxy for the S&P National AMT-Free Municipal Bond Index. The fund is basically unchanged over the past three weeks.
Munis were propelled in the third quarter by “extraordinarily tight technical factors,” wrote Walter O’Connor and Theodore Jaeckel, portfolio managers for BlackRock’s AMT-free municipal bond mutual fund, in their quarterly report.
Preliminary data from the Investment Company Institute showed investors entrusted more than $11.5 billion in new money to municipal bond mutual funds in the third quarter. Meanwhile, issuance of tax-exempt bonds was down 7.5% during that period, as Build America Bonds siphoned supply into the taxable market.
Now that tax-exempt rates have fallen so far, the fund has begun to pare back its positions and lock in profits, O’Connor and Jaeckel said. The portion of the fund’s assets held in cash has leaped to 5.5%, from an average of 3% during the third quarter.
“Historically low absolute yields argue for a more defensive posture in the future,” they wrote. “However the technical picture for municipals remains quite supportive.”
In the new-issue market Thursday, JPMorgan priced $262.3 million of health care facilities revenue bonds for the North Carolina Medical Care Commission.
The bonds mature between 2023 and 2025, with terms bonds offered in 2030, 2035, 2040, and 2043. Yields range from 4.05% in 2023 to 5% in 2043. The bonds are rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s, and AA-minus by Fitch Ratings.
Morgan Stanley priced $256.7 million of refunding GOs in two series for Chicago’s Board of Education. Both series are rated Aa2 by Moody’s, AA-minus by Standard & Poor’s, and A-plus by Fitch.
The first series — $184.4 million in tax-exempts — offered maturities from 2014 to 2021, plus term bonds maturing in 2031. All coupons are 5%, with yields ranging from 1.76% in 2014 to 3.66% in 2021 and 4.65% in 2031. The second series of $72.9 million of taxable bonds offers maturities from 2013 to 2017, with yields between 2.77% and 4.18%.
Barclays Capital priced $175.4 million of GOs for Delaware. The issue was rated triple-A by all three rating agencies and priced in two series. The first series for $115.8 million of BABs offered yields ranging from 3.11% in 2019 to 4.60% in 2030. The second series for $59.6 million of aualified school construction bonds mature in 2029 with a 4.55% coupon at par.
