A municipal market low in energy and apparent direction soldiered through a lackluster day of issuance and trading.
While Treasury yields rose, particularly in later maturities, munis hovered with little to go on.
“There was not much interest or that much enthusiasm out there,” a trader in New York said. “Many are thinking about the new issuance that starts tomorrow. There really wasn’t enough data or feel to assess the market.”
Muni yields went nowhere at the speed of light Monday, according to the Municipal Market Data triple-A yield curve. They started out flat across the curve and held their course until the close.
The 10-year benchmark yield stood at 2.63% for the eighth day in a row, the MMD scale showed. The 30-year yield remained at 4.23% for a third straight day, its low since Nov. 12.
The two-year yield, at 0.42% for the 11th consecutive day, is holding at its lowest level since Sept. 7, according to MMD. Before that, it stayed at 0.44% for 17 straight sessions.
Still, the trader said muni yields seemed off by a basis point, at least on some portion of the curve.
“I feel we’re slightly weaker today,” he said. “We had to give up something because of how the Treasuries went. That’s a heavy weight — that much of a move on a Monday morning.”
Treasury yields weakened across the curve Monday. The 10-year yield increased six basis points to 2.93%. The two-year yield climbed six basis points to 0.37%. The 30-year yield rocketed 10 basis points to 4.28%.
New issuance should continue to reach relatively middling levels for the week. Munis scheduled for sale total $5.62 billion against a revised $5.82 billion last week, according to The Bond Buyer.
This makes it four consecutive weeks that issuance has topped $5 billion. For the year, new deals have averaged just more than $3 billion through May.
The largest deals slated for the week arrive Wednesday. They include a New York deal for $975 million from the Tobacco Settlement Financing Corp., and one for $900 million from the Citizens Property Insurance Corp. in Florida.
Also, the Houston Airport System on Tuesday is expected to issue $500 million of subordinate-lien revenue refunding bonds.
In Monday’s new-issue market, JPMorgan priced for retail investors $167.3 million of bonds for the Gwinnett County, Ga., Water and Sewerage Authority. The credit is rated triple-A by all three major rating agencies.
Yields range from 0.25% with a 2.00% coupon in 2012 to 2.73% with a 5.00% coupon in 2021. Maturities from 2022 to 2025 were not offered to retail investors.
When it arrives, the new issuance should meet an audience flush with cash that yearns for lower yields. Demand at such low levels has been spotty, according to JPMorgan’s Peter DeGroot in a recent research report.
“Insurance-based investors have been increasingly loath to put capital to work as asset liability pairing has become increasingly more difficult,” he wrote. “Retail demand has also been dropping as absolute levels and interest-rate risk discourage longer-term loans.”
Coupon and redemption payments for July and August should total $92 billion, he added. And there appears to have been a portion of June’s capital that has been resting on the sidelines, as well, DeGroot wrote.
Buyers will be looking for product that offers more yield, which this week’s issuance should bring, he added.
“We expect a good reception for deals that offer bonds in the short-intermediate portion of the curve,” DeGroot wrote. “This week’s larger high-grade deals have been lingering on dealer balance sheets as the lion’s share of inflows, and broader investor interest, have been into high-yield and intermediate municipal funds.”
But are there deals at these yields? George Friedlander says there are. For starters, the senior U.S. municipal securities strategist at Citi writes that there are opportunities farther out on the triple-A curve. This is because yield levels on the steep curve stand far higher than they were before the muni market’s plunge that began in November, he wrote.
When compared to the end of October 2010, yields on June 23 are up 32 basis points in the 20-year range, 39 basis points in 25 years, and 37 basis points in 30 years, according to Citi Investment Research and Analysis.
By comparison, yields in the five-year range were unchanged from those at the end of October. The one-year yield dropped seven basis points from that time. The one- to 30-year slope of the triple-A yield curve was 44 basis points steeper on June 23 than it was at the end of October 2010, Citi Investment Research and Analysis showed.
Investors putting money heavily into debt at the short end of the curve should take note — paper inside the six-year maturity range isn’t attractively priced, Friedlander wrote. But he goes further.
“The bottom line is that, in too-short portfolios, we would continue to put cash to work out along the curve,” he wrote.
There are also opportunities in lower-rated credits. These are attracting buyers, such as investors who continue to flock to high-yield bond funds. These funds have reported inflows six out of the past seven weeks, Lipper FMI numbers showed. Funds that report weekly saw inflows of about $101 million last week.
In general, Friedlander continues to tout medium-quality credits, such as those in the A and A-plus range, as well as strongly secured revenue bonds.
