Traders Stay Put and Keep Eyes on This Week

Muni traders were content to sit it out Friday and wait for opportunities expected to arise over the next five sessions, during which $8 billion is expected to hit the market.

Besides, all the action was in equities, where all three U.S. indexes rebounded from mid-morning losses and posted a fifth straight session of gains. The Dow Jones Industrial Average finished the week 517 points higher — a 4.7% gain.

“That volatility isn’t helping,” a New York trader said. “It sort of crosses over into bonds. People become wary and it’s hard to get excited about stuff.”

Tax-exempts faced little movement all day. Municipal Market Data only indicated a one-basis-point uptick for bonds maturing between 2015 and 2021.

Tax-exempt yields had weakened the previous two days, coming off record lows earlier in the week.

The 10-year muni yield finished at 2.13%, up six basis points from the all-time low recorded earlier in the week. It remains nine basis points lower than at the start of the month.

The 30-year yield stood still at 3.70%, four basis points higher on the week but 18 basis points under the Sept. 1 level.

The two-year yield, which held for 25 sessions at its lowest level in more than 40 years until a two basis point uptick on Thursday, remained at 0.32%.

“People want to see rates back up,” the New York trader said. “There continues to be some appetite but buyers are less interested in these levels. There’s not a whole lot of supply to drive it either way. People are hoping for supply and that spreads will widen.”

According to MMD’s weekly survey, 56% of traders are bearish over the next week, meaning they anticipate muni yields to rise.

The remainder are neutral; none are bullish. On a one- to two-month outlook, a third are bearish and the rest are neutral.

Treasuries were softer at the open Friday but ended modestly firmer. The benchmark 10-year yield fell three basis points to 2.06%, the two-year yield dropped two basis points to 0.17%, and the 30-year yield declined four basis points to 3.32%.

Thanks to falling Treasury yields, muni-Treasury ratios were more attractive by day’s end. The 10-year ratio closed the week at 102.90% and the 30-year ratio ended at 111.1%.

Triple-B rated munis with a 10-year maturity currently offer an absolute yield of 4.18%, according to MMD, or 202% of the 10-year Treasury rate. Earlier in the month, that ratio was as high as 214.6%.

The retail market doesn’t care much for ratios, however. It wants to see absolute yields rising.

The New York trader said there is sideline money just waiting for rates to become attractive and be put to work. Yet buyers realize rates can’t go too high, and that’s dampening selling pressure.

“Nobody is confused about this low-rate environment,” he said. “We’ll be here for a while. People will be paid to be patient.”

A trader in Chicago said traders were looking at their screens Friday, hoping an interesting deal would pop out as pedestrian bonds were hard to come by.

“Guys are looking for something out of the ordinary, a callable bond or maybe a higher-yielding bond, something to get an edge,” he said. “But it’s like skating on ice with rollerblades on — it’s hard to get an edge.”

This week’s supply should change the dynamics and generate activity.

Major deals this week include a $2.6 billion general obligation deal from California, a $265 million offering from Arizona’s Salt River Project, a $260 million deal from the Connecticut Health and Educational Facilities Authority, and a $250 million refunding deal from Wisconsin.

The Bond Buyer’s 30-day visible supply stood at $10.8 billion Friday, down from $11.35 billion a day before. As recently as Aug. 26, it was just $3.5 billion.

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