Investors on Monday looked to the economy for direction as another relatively healthy calendar gradually lumbered into focus for the week.
This meant traders saw little action in the secondary market on the day, according to a New York trader.
"Monday was a foxhole day, as the market hasn't had any real supply and prepares for what little supply there is," he said. "If Treasuries don't move much in either direction, then the market just sits and people just look at the calendar."
Investors have been looking for some indication of whether the economy is in a slowdown or a double dip, the trader added. Investors need better verification going forward of one or the other, and they're not getting that clarity immediately.
"It could be two or three months before the real story emerges," the New York trader said. "There's no conviction either way; it's somewhat mixed. And we're stuck here."
Muni yields across the curve ranged from flat to two basis points lower on the day, according to Municipal Market Data.
Yields at the short end of the curve declined two basis points. Maturities in the belly of the curve were flat to one basis point lower. Long-term tax-exempt yields fell one basis point.
That also translated into muni yields ending the day flat to two basis points lower throughout MMD's triple-A scale.
Yields for both two-year and 30-year tax-exempts closed at calendar-year lows. The two-year yield fell two basis points to 0.42%.
The 30-year yield closed one basis point lower, at 4.24%. The benchmark 10-year yield held steady at 2.61%, two basis points above its 2011 low, for the fourth straight session.
By Monday's close, Treasury yields were flat to three basis points higher. The two-year yield held at 0.40%. The 10-year yield skipped up two basis points to 2.99%. The 30-year yield jumped to 4.21%.
The muni market anticipates healthy supply this week, relative to how the year has gone. New deals reaching the market should total $5.22 billion.
Los Angeles and Utah both expect deals of more than $600 million. Last week $5.7 billion reached the market, according to Ipreo LLC and The Bond Buyer, ranking it among the largest new-issuance weeks of the year. So far in 2011, weekly volume has averaged around $3 billion.
Analysts and traders noted that the boost in supply should meet an investor class flush with money ready to be put to work. Redemptions and coupon payments mean the market is primed to absorb the new debt.
Municipal Market Advisors estimated that around $77 billion in munis will mature in June and July, a figure that excludes coupon reinvestment.
"There's a lot of money around," the New York trader said. "Guys are willing to spend it on the right bonds at the right price."
In the negotiated market, Bank of America Merrill Lynch priced $193 million of New York State Environmental Facilities Corp. state revolving funds revenue bonds for retail.
Bonds that mature in 2011 and 2012 were offered in a sealed bid. The other bonds, from 2013 to 2034, offer coupons that range from 3% to 5%, with yields ranging from 0.47% in 2013 to 4.32% in 2034.
Bonds maturing from 2022 through 2025, from 2027 through 2030, and those maturing in 2041 were not offered to retail investors.
The bonds are rated triple-A by all three major rating agencies.
Piper Jaffray & Co. priced $522.23 million in notes for the California School Cash Reserve Program Authority.
A trader in Chicago said investors haven't seen the kind of results they hoped from Washington's efforts to steer the economy into calmer waters. States have showed a degree of success with their budgets, but that could change.
"No one knows in what direction to go," the Chicago trader said. "QE2 is over. There's a flight to quality, but we need to get everybody's houses in order, states and cities."
Industry experts agree that there is plenty of money on the sidelines to invest in the market. Traders also said that the low yields could be around for a while.
"I think we're going to sit down around these rates for some time, until the economy starts to pick up, and that could be a while," the Chicago trader said. "There's plenty of money to buy and reason to buy, but for the fact that rates are pretty darned low."
The negative economic data that has raised concerns for a slowdown and led to a subsequent flight-to-quality also has caused a cheapening of munis across the curve on a relative value basis, Bank of America Merrill Lynch's John Hallacy wrote in a recent market commentary. But there is still value to be found.
"Munis appear the cheapest in the short and long ends of the curve with the two-year and three-year ratios at 104.3% and 96.6%, respectively, and the 20-year and 30-year ratios at 106.6% and 100.7%, respectively," he wrote. "The five- to 10-year part of the curve appears to be the richest currently."
Other analysts view the market favorably.
The tone of the market is considerably stronger than just a few months ago, according to John Dillon, chief muni strategist for Morgan Stanley Smith Barney. And the current pause in the recent yield rally that's apparently in place gives market participants "a much-needed breather to contemplate whether current relative-value metrics dictate value," Dillon wrote. "There is also time to determine what the primary drivers of the market will be looking forward."
Recent tax revenue reports for states have also delivered promising news, according to a recent newsletter from Fitch Ratings. It showed returns well above those in 2010, as well as "meaningfully above forecast" in many cases.
"This has been particularly true for personal income tax receipts in high-income states," Fitch analysts wrote. "Solid performance is not limited to the personal income tax."
"Overall, states are meeting or exceeding budget estimates, so there is upside for fiscal 2011 year-end results, which makes the forecasts for the coming fiscal year more conservative given the higher starting point," the newsletter said.
