The municipal market was unchanged to slightly firmer Tuesday in light to moderate secondary trading.
“The activity level on the Street is slowly returning to a more normal level now that we’re finding ourselves further and further removed from the holidays,” a trader in Los Angeles said. “The new-issue calendar is still completely barren, but that will pick up as January progresses.”
The Los Angeles trader said yields narrowed by a couple of basis points Tuesday in intermediate maturities.
The Municipal Market Data triple-A 10-year scale fell three basis points to 3.18%, the 20-year scale was unchanged at 4.47%, and the scale for 30-year debt held at 4.68%.
“There’s a little bit of firmness, but it’s just a basis point or so,” a trader in New York said. “There are some bits and pieces trading, but it’s fairly quiet for the most part.”
In the daily MMD commentary, Randy Smolik wrote that dealers are getting anxious to own bonds around the 10-year range as the secondary remains thin and primary supply could be slow to pick up its pace.
“In thin markets, wide spreads between early to mid- and late-dated paper of the same year provide an opportunity as market focuses on January yield after the MMD roll,” he wrote. “Potential sell pressure out long keeps trading relaxed in longer serial and dollar bond sectors. Treasuries showed a steeper curve as well.”
Tuesday’s triple-A muni scale in 10 years was at 94.9% of comparable Treasuries and 30-year munis were at 105.4%, according to MMD. Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 110.9% of the comparable London Interbank Offered Rate.
The Treasury market showed some losses Tuesday. The benchmark 10-year note was quoted near the end of the session at 3.33% after also opening at 3.33%. The 30-year bond was quoted near the end of the session at 4.42% after opening at 4.40%. The two-year note was quoted near the end of the session at 0.63% after opening at 0.59%.
Municipalities will continue their hiatus from borrowing money this week. 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. Typical weekly issuance is about $8 billion.
Municipal market participants were looking forward to this lull in supply during the spasm of bond sales that characterized most of the fourth quarter. A $131.2 billion flurry of debt issuance in the fourth quarter helped propel the municipal bond market to a record $431 billion of issuance in 2010.
This barrage of new bonds put the brakes on a municipal rally that narrowed 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 began eying rising Treasury yields and became 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. This may simply be because buyers are on vacation, but it likely reflects, at least in some part, selling from mutual funds.
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 experienced an additional $32.2 billion of inflows the first 10 months of last year.
Investors began draining money from the funds in November. 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.
“We will be reading much of deficits, unpalatable service cuts, exorbitant fee increases and tax bumps in coming weeks and months as new administrations and legislatures face the economic realities of post recession government,” Alan Schankel, managing director at Janney Capital Markets, wrote in a commentary in which he cautioned against panicking in the face of news headlines.
“Times are and will continue to be tough, but even the poster children for distressed states, such as Illinois and California, have very low chances of missed debt-service payments,” he wrote.
Schankel said that changes in these states’ relative yields since Dec. 1 make for interesting considerations. Based on MMD benchmark yields, he indicated that Delaware yields rose 36 basis points to 3.16%, California yields rose 36 basis points to 4.41%, and yields for Illinois — the most troubled state — increased 71 basis points to 5.26%.
In Tuesday’s new-issue market, Wells Fargo Securities priced $80.3 million of debt for the Maine Municipal Bond Bank.
The bonds mature from 2011 through 2031, with yields ranging from 0.50% with a 3% coupon in 2011 to 4.72% with a 5% coupon in 2031.
The bonds, which are callable at par in 2020, are rated AAA by both Standard & Poor’s and Fitch Ratings.
In economic data released Tuesday, factory orders increased 0.7% in November as orders excluding transportation jumped by the largest amount in eight months.
Orders excluding transportation rose 2.4%, the largest increase since March. Orders for transportation equipment fell 11.1% as auto orders dropped 1.8%. Factory orders excluding transportation have increased for four straight months.
Economists expected factory orders would increase 0.3%, according to the median estimate from Thomson Reuters. Orders in October were revised higher to a decrease of 0.7% from a 0.9% drop reported last month.
