Tax-exempt yields firmed by two basis points on the short end but trading of longer maturities remains stagnant as bid-wanted lists go ignored.
“Dealers aren’t willing to step in at these levels right now, so you’re not going to see a lot of dealers stocking bonds, which is usually a source of liquidity,” a New York trader said.
He described the bid-wanted list as “pretty strong for a Monday,” adding that customers may be taking gains or trying to raise cash for new deals coming up this week. Purchases remain light, though, as investors expect bond prices to cheapen significantly once volume advances from the current 11-year low.
“You’re not seeing a lot of participants buying,” the trader said. “You have strong demand five years and in, but going out longer you see these offerings and there are no bites. You’re seeing the same offerings from the same customers every day.”
The Municipal Market Data scale showed the 10-year triple-A yield holding steady at 3% while the 30-year scale remained at 4.78%. The 10-year and 30-year scales have been stable for the last seven and six sessions, respectively, amid light new volume and thin demand.
“The scales happen from trading activity,” the New York trader explained. “Once these trades start printing, you’re going to see the long-end of the curve kick out, because it’s been unchanged for a while.”
Analysts from Piper Jaffray described the muni market as being in gridlock.
“Municipal investors remain generally apathetic at current yield levels and skeptical that these levels can be sustained should new-issue supply increase from current levels,” they wrote in a research note Monday.
The benchmark 10-year triple-A yielded 89.6% of comparable Treasuries on Monday, versus as much as 104.2% in mid-January.
Citi’s George Friedlander added that the lack of trading continues to mask how weak sentiment is in the market.
“The continuing extremely light new-issue calendar creates challenges for price discovery while also leading to concerns regarding potential pressures on longer maturities when volume picks up,” he wrote in a note published Friday.
Stating that new volume is at an 11-year low may even be too generous, according to Chris Holmes and Alex Roever at JPMorgan. They note that relative to the size of the muni bond market, first-quarter issuance is on track to be the lowest since 1966.
“Issuance has never been lower; the market has never been larger,” they summed up in a Friday note. “The apparent strength in municipal bond valuation is a near-term technical aberration driven by the absence of” new issuance and short-term rates that are higher than 0.25%.
There continues to be appetite for short-term paper. The MMD scale improved two basis points Monday to 0.68% — a calendar-year low.
“Most of the action, if you want to call it that, is on the short end,” a trader in New Jersey said. “People want to stay short and they’re being pretty defensive — not because they are worried about municipal bonds so much as general volatility in the government market.”
Another trend is a bias towards top-rated debt.
The spread between single-A tax-exempt bonds and triple-A tax-exempts has been 113 basis points for the last seven trading sessions. Not only is that 19 basis points higher than at the start of the year, it marks the widest spread since August 2009.
“If it’s not double-A or better, forget about it,” a different New York trader said.
The two-year single-A scale yielded 1.39% on Monday — more than double the 0.68% yield on the triple-A bond. The 30-year single-A scale yielded 5.64%, or 86 basis points more than the triple-A equivalent.
Among Treasuries, the 10-year note closed the day three basis points firmer at 3.36%. The two-year yield picked up one basis point to 0.61% and the 30-year yield fell one basis point to 4.53%.
Economists at BMO Capital Markets said the steepening yield curve among Treasuries could be due to insurance companies selling liquid assets to cover claims owing to the Japanese earthquake.
Nomura Securities described the earthquake’s impact in Japan as worse than originally anticipated. In addition to uncounted deaths, 11 nuclear reactors and three oil refineries were shut down over the weekend.
The damage hasn’t yet extended into Muni Land, according to several traders.
In the new-issue market Monday, the largest deal to price was $10.7 million of refunding bonds for the Guadalupe-Blanco River Authority.
The bonds, rated Aa2 by Moody’s Investors Service, offered yields from 0.55% in 2011 to 4.74% in 2030. Raymond James & Co. was the lead underwriter.
New supply this week is expected to total $2.5 billion, according to Ipreo LLC and The Bond Buyer, versus the $4.46 billion sold last week and a 2010 weekly average of roughly $8 billion.
Deals expected to hit the market Tuesday include $116.8 million of general obligation bonds issued by Wake County, N.C. The debt is rated triple-A by Standard & Poor’s and Moody’s.
Minneapolis is also slated to offer $105.1 million of GO debt, also rated triple-A by Standard & Poor’s and Moody’s.
The Bond Buyer’s 30-day visible supply was $5.9 billion on Monday, reflecting that new volume isn’t expected to become robust any time soon.
When it does return, the increase should be sharp but still remain below the historical trend “as a broad wave of fiscal conservatism sweeps across state and local governments,” Friedlander wrote.
“We do expect issuance in general, and long-term revenue bond issuance in particular, to rebound at some point,” he added. “When it does, expect to see some additional pressure on yields, particularly on medium-term quality revenue bonds, which lack a sufficient 'natural’ buyer base until bond fund flows turn positive.”
He recommended high-quality purchases in the 12-to-20-year range. Once volume rebounds, Friedlander expects longer, medium-quality revenue bonds to offer attractive values.
“We simply think that it is too early to make such a move now,” he said, “until volume returns and we see what the impact on long-term yields is likely to be.”
