Hurricane Irene has come and gone, but the municipal market managed to get swept up in her tailwinds Monday, leading to sparse attendance on some trading desks and extremely light activity in the primary and secondary.
“It was a very quiet Monday,” said a trader in California. “There seemed to be a lot fewer bid-wanteds; it might be because people in New York weren’t at their desks. The market was maybe a touch weaker, but there was very little activity going on and it was hard to get a read.”
Little supply, trading industry firms at half-staff levels, and the coming holiday weekend all made for conditions that didn’t augur well for a strong day or week, said a trader in New York. And customers most likely aren’t going to feel like putting their money to work, he added.
That’s primarily due to the fact that there’s very little available in which to put anything.
“The culmination of all those things unfortunately leads to the prospects of a pretty quiet, slow and extremely low-volume week,” the trader said.
Through it all, tax-exempt yields were only slightly weaker through the middle and back ends of the curve Monday, according to the Municipal Market Data scale. They were steady through 2015. Securities maturing beyond 2015 rose one basis point.
The benchmark 10-year muni yield ticked up one basis point to 2.27%. The 30-year muni yield also rose one basis point on the day, to 3.89%.
The two-year yield remained at 0.30% for a 14th straight session, hovering at its lowest yield in more than 40 years.
“We’re really in the end-of-summer drift here,” the California trader said. “But relative to what’s happening in the Treasury market, we have to feel pretty good about today.”
Treasury yields concluded Monday’s session weaker across the curve. The 10-year benchmark yield, after sliding 11 basis points the final two trading sessions last week, climbed nine basis points to 2.28%.
The 30-year yield, after falling 11 basis points Thursday and Friday, rose eight basis points to 3.62%. The two-year yield ticked up two basis points to 0.22%.
New issuance, historically low the week preceding Labor Day, is expected to be exceptionally meager. According to industry estimates, municipal bond sales scheduled for this week should total $1.2 billion, compared to a revised $4.4 billion last week.
The past few trading sessions have not seen any planned selling by property casualty firms trying to raise cash as a result of the hurricane, either, said another trader in New York. But traders said they’d be looking for it.
Typically, property casualty firms would initiate selling to raise cash only when their claims started to surface, the trader said. And this could start as soon as the coming weekend, or take a few weeks, depending on the extent of damage.
“There are some larger firms that have people on the ground in those areas and are able to process claims faster,” the trader said. “We’ll start looking into that [this] weekend.”
The week’s new issuance isn’t expected to include any deals on either the competitive or negotiated side that exceed $200 million. No deals of any significant size reached the market Monday.
In fact, this week’s projected supply is likely to be the lowest origination in a non-holiday week since the financial crisis in 2008, JPMorgan fixed-income analyst Peter DeGroot wrote in a recent report. Additionally, the firm expects supply to remain subdued even though capital costs are extremely low, because issuers have been hesitant to increase debt burdens while budgets are being cut, economic growth is projected to slow, and volatility is expected to remain extreme.
“The Fed’s decision to maintain a low funds rate until mid-2013 has reduced the sense of urgency on the part of some issuers to term-out securities,” DeGroot wrote.
New issuance for September is expected to be $21 billion, or 28% below average volume over the trailing five years, at $29 billion. As coupon and redemption flows recede in October and November, he added, the level of excess reinvestment capital should decelerate noticeably.
“We expect new-money deals will be focused on infrastructure development and maintenance as expansion-related and other nonessential projects are expected to remain constrained,” DeGroot wrote. “The expected lower levels of origination should facilitate distribution given the rate-induced slack demand and expected continued moderate outflows.”
But there is one advantage to less supply.
Higher levels of supply, DeGroot wrote, would clearly be a struggle in the 10-year-plus portion of the curve, with investors “becoming more demanding around structure and covenants.”
Economic news on the day was positive. Leading off, the Commerce Department reported that personal spending rose 0.8% in July.
The number represents the biggest increase since August 2009. Personal income rose 0.3% on a seasonally adjusted basis.
In addition, the National Association of Realtors reported Monday that pending home sales declined 1.3% to a reading of 89.7 in July from a revised 90.9 in June.
The stock market took the solid economic data and ran with it. The major equities indexes all ended the day higher by at least 2.26%. The Dow Jones Industrial Average closed up almost 255 points.
