A quiet secondary market on Friday capped a week of substantial new issuance in the primary.
Muni yields held their ground and traded in a tight range, revealing a strong market. But the secondary suffered throughout the week in the fallout of new deals, a trader in California said.
“The market’s still strong as ever,” he said. “But things have gotten ugly, with yields so low, no supply. Everyone’s stashed up whatever they can. Everyone’s starved for paper. Everyone’s sitting on cash.”
Muni yields remained steady across all but the long end of the curve, according to the Municipal Market Data scale. Bonds maturing after 2033 fell one basis point.
The benchmark 10-year tax-exempt yield remained unchanged Friday at 2.68% after falling in previous trading sessions. The two-year yield once again held at its low for the year, 0.40%, for a ninth straight session. The 30-year yield fell one basis point on the day to 4.34%.
Treasury yields closed the week mostly firmer across the curve. The 10-year yield dropped four basis points to 2.97%. The 30-year yield fell five basis points to 4.26%. The two-year yield held steady at 0.40%.
New issuance dominated headlines for the industry last week. The total was estimated at roughly $8.3 billion, making it the largest volume for new debt offerings this year. This week’s volume estimate shows a decrease in new deals. About $4.1 billion in new issuance is expected.
One might expect new issuance to be higher this week. With the nation’s debt ceiling deadline rapidly approaching, some might expect municipalities to try to issue bonds before the deadline arrives with its accompanying uncertainty.
Most likely, that won’t be the case, according to a trader in New York. For one, the debt ceiling date is approaching much faster than issuers expected. It’s unlikely that they would push a slew of new deals to market, he said.
“They’re really late to the starting line now,” the trader said. “The debt ceiling really sprung up on a few states.” He added that a lot of states are still coming off their extensive issuance of Build America Bonds back in December to have cash on hand.
What’s more, some states haven’t completely finished their budgets, and so don’t really know how much they need. And they won’t issue paper until they know what they’ll need for the six months or year to come, the trader said.
But issuance should pick up sometime in the late third to early fourth quarter, he added: “We’ll see a lot more refunding deals to get rid of some of that 5.25% or 5% coupons and bring it down to the 3% or 4% coupons and save a little money.”
The industry also followed up a particularly strong week of new deals with muni bond fund inflows. The market has seen net inflows for five of the past seven weeks, according to Lipper FMI.
But a closer look at the numbers showed that, once again, flows were concentrated in short and intermediate funds, as well as high-yield funds, according to RBC Capital Markets’ Chris Mauro. “Mutual fund investors continue to be reluctant, at current nominal yield levels, to commit funds to the long end of the muni market,” he wrote in a research post, “unless those funds are directed to high-yield tax-exempt investments.”
