The municipal market was unchanged to slightly firmer Monday amid light secondary trading activity on the first full trading day of 2011.
“It’s quiet, but there’s a touch of firmness,” a trader in New York said. “We’re maybe up a basis point or so, but there’s really not a lot trading.”
“There’s a firmer tone, though I think it’s mostly flat,” a trader in Los Angeles said. “You could pick up a basis point or two maybe in the belly of the curve, but the secondary is pretty quiet and there isn’t a whole lot of movement.”
The Municipal Market Data triple-A 10-year scale rose five basis points Monday to 3.21%, the 20-year scale increased eight basis points to 4.47%, and the scale for 30-year debt held at 4.68%.
In the daily MMD commentary, Randy Smolik wrote: “The MMD roll from December to January maturities typically will cause generic spots on the curve to rise, like the generic [10-year] spot rising from 3.16% last Friday to 3.21% today.”
Monday’s triple-A muni scale in 10 years was at 96.7% of comparable Treasuries and 30-year munis were at 106.8%, according to MMD.
Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 112.5% of the comparable London Interbank Offered Rate.
The Treasury market was weaker Monday. The benchmark 10-year note finished at 3.34% after opening at 3.29%. The 30-year bond finished at 4.40% after opening at 4.33%. The two-year note finished at 0.60% after opening at 0.58%.
Municipalities will continue their hiatus from borrowing money this week as they are once again slated to sell a meager amount of new debt.
State and local governments are scheduled to sell just $723.6 million of bonds this week, according to The Bond Buyer and Ipreo data, an uncommonly small amount of debt.
This comes on the heels of a final week of 2010 in which a solitary issuer was scheduled to sell a measly $525,000 of bonds.
This is the supply lull municipal market participants were looking forward to during the paroxysm of issuance in the fourth quarter.
A $133 billion flurry of debt issuance in the quarter helped propel the municipal bond market to a record $432 billion of issuance in 2010.
This barrage of new debt put the skids on the municipal rally that brought yields to all-time lows late in the summer.
As the municipal bond market was stuffed with week after week of $10 billion-plus in new issuance in the fourth quarter, trading desks eying rising Treasury yields were wary of taking on bonds. The market had trouble finding buyers for all the new debt without offering higher rates.
Now that supply has all but vanished, the market isn’t exactly falling over itself to buy bonds.
Yields have eased down nine basis points from their near-term peak of 3.25% on Dec. 16, according to the Municipal Market Advisors 10-year triple-A scale, but remain about 50 basis points above where they were at the end of the third quarter.
This may simply be because buyers are on vacation, but it likely reflects selling from mutual funds, at least in some part. Municipal bond mutual funds became a more critical buyer in the past two years as they were awash in $69 billion of new money from investors in 2009 and an additional $32.2 billion of inflows the first 10 months of last year.
Investors suddenly began taking money out in November, and mutual funds have contended with more than $17 billion in outflows the past two months, according to the Investment Company Institute. Redemptions typically force mutual funds to sell bonds to raise the cash to return to investors.
Alex Rorke, head of public finance at Loop Capital Markets, said January is traditionally “a very good month” for municipals as a curtailment in supply is met with reinvestment money from coupon payments on existing bonds.
“We expect to see very strong demand,” Rorke said.
The biggest deal on the calendar this week is a $420.1 million of bonds from the Massachusetts Development Finance Agency on behalf of Partners HealthCare System, a nonprofit that operates about a dozen hospitals in the state. The lead underwriter is JPMorgan.
This complicated deal comes in six series, some of which have numerous subseries.
Two series with $100 million of par value will be variable-rate notes with a bank guarantor and a remarketing agent. Two series with roughly $140 million of par value will be puttable variable-rate notes, but with no bank guarantor.
Another $48.9 million will be floating-rate notes with interest rates resetting based on a spread to the Securities Industry and Financial Markets Association index, which measures yields on tax-free variable rate demand obligations.
Finally, $130.8 million will be term bonds maturing from 2014 to 2021, plus a bullet maturity in 2041.
In economic data released Monday, the overall economy grew for the 20th straight time, while the manufacturing sector expanded for the 17th time, ISM reported.
According to its monthly report on business, the ISM index crept to 57.0 in December from 56.6 in November.
Economists polled by Thomson Reuters predicted the index would rise to 56.9.
Construction spending increased 0.4% in November, stronger than economists expected, as private construction continued to gain.
Economists expected total construction spending would increase 0.2%, according to the median estimate from Thomson Reuters.
