Municipal Buyers Come Out in Full Force

Municipal bond investors were determined to put money to work Friday in the face of falling yields and a dearth of high-quality blocks.

Whether it was because they were tired of sitting in short-term money market funds, flush with Dec. 1 coupon money and expecting cheaper prices, or anxious about having even less supply from which to choose as the holidays approach, investors were buying on Friday.

But those who hoped to buy cheaper muni bonds because Treasuries were cheaper were disappointed to find that they did not have that opportunity, a trader in California said.

"People are going into bonds that are available right now, and not waiting," he said. "They've learned their lesson this week: just because things have sold off [in the Treasury market] doesn't correlate into more attractive pricing on municipal bonds."

Subsequently, muni yields mostly firmed Friday, according to the Municipal Market Data scale. They were unchanged out to three years. But thereafter, they fell two to five basis points.

Yields saw their strongest downward pull in the six- to 22-year range, where they dropped four to five basis points.

The benchmark 10-year yield finished the day's session four basis points lower at 2.18%. It closed the week down three basis points.

The two-year yield ended the day flat at 0.39% after holding steady at 0.42% for 20 consecutive trading sessions. The 30-year yield finished down three basis points to 3.83%, but eight basis points higher for the week.

Treasuries had a better day but a softer week. They closed out Friday mostly stronger after opening the day's session slightly weaker.

The benchmark 10-year yield fell six basis points to 2.04%. For the week, it jumped 17 basis points.

The two-year yield held steady at 0.26%, finishing the week down one basis point. The 30-year yield dropped eight basis points to 3.02%. For the week, it climbed 20 basis points.

Primary market volume should remain near the $6 billion range. Industry estimates for expected market volume total $5.82 billion this week, against a revised $5.88 billion last week.

The level of supply should remain relatively manageable over the week as the holiday season picks up, MMD analysts Randy Smolik and Domenic Vonella wrote in a research post. And though the number of loans should increase from last week's volume, they don't anticipate any of what they call "mega" loans.

"As staffing begins to thin and transaction levels lighten, we expect that market technicals will drive price action for the muni sector into the end of the year and into the new year," they wrote. "Supply, redemption data and muni-Treasury ratios are expected to be the dominant themes over this week and month as the market settles into the holidays."

Municipal bond mutual funds saw outflows after seven straight weeks of inflows.

The week ended Nov. 30 saw about $297 million in outflows from muni bond funds that report their flows weekly, according to Lipper FMI. In the week ending Nov. 23, there were net inflows of $137 million.

High-yield muni funds, meanwhile, saw a second straight week of outflows over the same period. Funds that report weekly saw outflows of $133 million, Lipper numbers showed. The previous week, high-yield funds reported outflows of $111 million.

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