The tax-exempt market was business as usual, with the typical Monday doldrums taking over the market.
“It was a typical Monday,” said a trader in New York. “It was kind of a quiet day and just a little slow today.”
A lack of motivation also stalled the secondary market, with one trader noting buying and selling was tentative in the afternoon.
“I wouldn’t say there is any sort of motivated buying or selling,” said a trader in Chicago. “If you want to really buy something, you’re going to have to make a statement with a big price. And if you want to sell something, you’re going to have to make a statement with a cheap offering.”
The Chicago trader added: “I’m not seeing it awash with people who are buying, and I’m not looking at huge bid-wanted lists. Everyone is watching these deals to see how they set up.”
The majority of the calendar is expected to be priced Tuesday and Wednesday of this week. “The scale will be priced aggressively,” he said. “So if you’re committing capital in the secondary, you’re looking to add something that will have immediate turnover potential.”
A trader in New Jersey added the market is digesting new issues pretty well and all in all, “the market is fine.” But “yield is still king,” he added. “If there is more yield with decent credit, there are people on the bid side.”
The Chicago trader also noted changes in coupon structures that are trading. “I think the average coupon has fallen in terms of what is acceptable,” he said. “There are some 2s of 2019, and they got decent subscription. The 3% coupon is putting out past 15 years, and 4s are acceptable at the end of the curve.”
Before this change, he said 5% coupons with a 2050-plus maturity and a 10-year call was what everyone was trying to buy. “And now that coupon is a lot more flexible.”
As the end of the year approaches there will not be a lot of guessing about trades. “There are firms that want to build for Jan. 1 and firms that want to be flat on Dec. 31,” the Chicago trader said. “Everyone knows what the strike zone looks like and has their marching orders for the end of the year.”
“You have the end of the year positioning,” said a trader in New Jersey. “People seem to have bonds, and they are looking to possibly add to positions.” He said buyers will go into January “relatively heavy if they can.”
Munis were mostly flat with the seven- to nine-year firming slightly, according to the Municipal Market Data scale. The seven-year yield fell one basis point while the eight- and nine-year yields fell two basis points.
On Monday, the two-year muni yield closed flat at 0.36% for its fourth consecutive trading session. The 10- and 30-year muni yield closed flat for the third consecutive trading session at 1.97% and 3.69%, respectively.
Treasuries were choppy Monday with a rally in the morning followed by Treasuries paring back some of the gains in the afternoon. The benchmark 10-year yield fell seven basis points by early afternoon, but then closed down only four basis points to 2.03%. The 30-year yield fell seven basis points but pared back gains to finish down only five basis points at 3.06%. The two-year yield fell one basis point to 0.23%.
There were no major deals in the primary market Monday, but new issuance is expected to pick up later in the week. The market can expect $5.69 billion, with $4.09 billion in negotiated and $1.6 billion in competitive deals.
The secondary market was showing strength on Monday. Munis were firming across the curve, with the most action in the 10-year spot.
A dealer bought from a customer University of Connecticut 5s of 2024 at 2.65%, 11 basis points lower than where they traded Friday.
Bonds from an interdealer trade of Rockwall, Texas, Independent School District 5s of 2023 yielded 2.52%, 9 basis points lower than where they traded last Thursday.
Bonds were firming longer out on the curve as well. Bonds from an interdealer trade of Massachusetts Development Finance Agency 5s of 2036 yielded 4.47%, five basis points lower than where they traded Friday. Bonds from an interdealer trade of a different CUSIP of MassDevelopment 5s of 2041 yielded 4.53%, five basis points lower than in Friday trading.
Yields are falling in the intermediate range more than the long end for a few reasons, according to Citi analysts. “There are a number of sectors with cash to put to work in the intermediate maturity range, while the long end remains an orphan,” George Friedlander wrote.
And indeed, the 10-year yield fell 20 basis points last week to its lowest in more than 20 years, according to JPMorgan analyst Peter DeGroot. This is all due, in part, to “the cheap level entering the week, sizable reinvestment capital over the next three months, and the recent spike in fund flows,” he wrote. “These conditions have motivated buyers to accelerate purchases and spend down cash in anticipation of lower yields in early 2012.”
A New York trader said the plummeting 10-year yield was driven by traders that have bonds and were looking to move. “They got so cheap guys were really pushing and reaching for some stuff,” he said. “And they were willing to offer stuff through the market. They got a lot of big trades last week.”
Because of the drop in yields across the curve, muni-to-Treasury ratios are stealing headlines. Ratios fell last week after traders were “buying like crazy” on top of “huge volume” a second trader in New York said.
The 10-year muni-to-Treasury ratio hit its three-month low, closing at 95.6%. On Friday, the five-year muni-to-Treasury ratio closed at 106.7%, well off its three-month high of 136.8%, but still not yet at its three-month low of 95.8%. The 30-year ratio closed at 118.6%, diving close to its three-month low of 110.1%.
