Marked by little activity in the primary and secondary, the municipal bond market Tuesday essentially stood still, settling into a slow, pre-holiday-week languor.
The market, already two sessions into the week with little to show for itself, largely ignored firming Treasury yields and flat equities.
“Barring some extraneous occurrence outside of our particular markets, I don’t think we’ll have much of a shift the rest of the week,” a trader in New York said.
But in the wake of Hurricane Irene, the market was able to highlight one positive note. “The casualty companies had assumed that they’d have a much larger hit than they’ve had,” the trader added. “That helped us stay stable.”
Tax-exempt yields ended the day mostly unchanged throughout the curve, according to the Municipal Market Data scale. Securities maturing between 2020 and 2022 fell one basis point.
On the day, the benchmark 10-year muni yield slipped one basis point to 2.26%. The 30-year muni yield held steady at 3.89%.
The two-year yield remained at 0.30% for a 15th straight session, floating at its lowest in more than 40 years.
Treasury yields firmed across the curve Tuesday, more or less reversing Monday’s weakening. The 10-year benchmark yield, after climbing nine basis points Monday, dropped nine basis points to 2.19%.
The 30-year yield, after rising eight basis points Monday, fell nine basis points to 3.53%. The two-year yield has inched down one basis point to 0.21%, after ticking up two basis points Monday.
New issuance the week before Labor Day typically is rather low, and this week is not expected to be any different. According to industry estimates, municipal bond sales scheduled for this week should total a scanty $1.2 billion, compared to a revised $4.4 billion last week.
In the biggest negotiated deal of the week thus far, Wells Fargo Securities priced for retail $126.2 million of Tampa, Fla., water and sewer systems improvement and refunding revenue bonds. The bonds are rated Aa1 by Moody’s Investors Service and AA-plus by Standard & Poor’s and Fitch Ratings.
Yields range from 0.53% with a 2.00% coupon in 2013 to 4.18% with a 4.125% coupon in 2031. Debt maturing in 2012 was offered in a sealed bid.
RBC Capital Markets priced $47.4 million of Northwest Independent School District, for Denton, Tarrant, and Wise counties, Texas, unlimited tax school building bonds. The bonds are rated Aaa/Aa2 by Moody’s and AAA/AA by Fitch.
Yields range from 2.42% with a 3.00% coupon in 2020 to 4.22% with a 5.00% coupon in 2036.
Citi analyst George Friedlander expects the muni market to remain thin and lacking price discovery at least until a week after Labor Day. The market is desperate for additional new inventory to provide more confidence about yield levels.
“Price discovery in munis is almost exclusively a new issue market phenomenon,” Friedlander wrote in a recent report. “We also expect that heavier volume could provide more attractive yields, particularly in states and sectors that have been devoid of supply in recent weeks.”
The recent lackluster retail demand for munis has been in line with the continuing decline in yields, Friedlander added. This has been due primarily to what he calls rate shock and individual investor resistance, as well as the slow retail activity typically seen during this the time of year. It also may be related to how the lack of new issuance reduces secondary market float as well.
But these market conditions could have an upside to them, as well. They could suggest a buying opportunity for risk-averse retail investors who don’t want tax exposure, according to Chris Shayne, senior market analyst for BondDesk Group.
Treasury yields have rallied recently, to the tune of almost 100 basis points since July, according to MMD numbers. As they have, median yields in odd-lot munis — defined as the mid-point of the yields from the highest grade triple-A to the lowest grade junk that is traded within the odd-lot space — have been surprisingly steady, BondDesk numbers show.
Median muni yields for odd-lot transactions, which represent all investor transactions below $100,000 face value, or are synonymous with “retail” transactions, have hovered between 4% and 5% since January 2006. And because they haven’t strayed below that range for any extended period of time during that period, there is small risk that they will do so in the near future, Shayne wrote in a recent report.
Simultaneously, the spread between odd-lot muni yields and the 10-year Treasury yield has widened substantially since late July.
“Based on the historical relationship between Treasury and muni yields,” Shayne wrote, “it seems more likely that muni yields will fall rather than rise in the near term, meaning investors with cash today have little to gain by staying on the sidelines.”
The move is essentially a defensive strategy, Shayne added. Buying now hedges against any further declines in yields that may happen if Treasury yields remain low for an extended period. But it’s a low-risk strategy as well, Shayne wrote, because if Treasury yields reverse themselves, odd-lot median muni yields are unlikely to spike in the short term.
“These are the numbers that are germane to, and taken from, retail transactions,” Shayne told The Bond Buyer. “And presumably those spreads are going to start tightening, and then yields are going to move lower than they are now. If Treasury yields don’t come back up, the much more likely scenario is that muni yields will fall, rather than the other way around.”
In economic news, the Conference Board reported Tuesday that the consumer confidence index sank to 44.5 in August from a downward revised 59.2 in July. The July index was originally reported as 59.5. The index has reached its lowest level since April 2009, when it registered 40.8.
