The week between Christmas and New Year’s has typically been one of the slowest weeks of the year. But in 2011, the last week of December was anything but boring.
The 10-year muni yield broke records last week. On Friday, the 10-year muni yield fell three basis points to 1.83%, to set a new record low as recorded by Municipal Market Data.
Friday’s record broke the previous record, set Thursday at 1.86%, and Thursday’s record broke the record of 1.87% set Wednesday. Before that, the record of 1.91% was set the week before Christmas.
Throughout the week, the 30-year yield fell eight basis points to 3.55%. The two-year yield held steady at 0.36% on Friday for its 17th consecutive trading session.
Treasuries strengthened all week. The two-year yield fell five basis points to 0.25%. The benchmark 10-year yield fell 14 basis points during the week to close at 1.88%. The 30-year yield fell 15 basis points throughout the week to close at 2.89%.
It was not only a strong finish during the last trading week of 2011, but a great year for the entire muni sector.
“What a year this has been,” said MMD’s Randy Smolik. “It certainly was a very rewarding one for munis.” The 10-year triple-A muni yield fell from a high of 3.21% to Friday’s 1.83%.
On Friday, it came down to the last minute for traders looking for bonds during the final trading session of 2011.
“People are looking for bonds but not paying list prices,” a trader in New York said. “They are not being aggressive and there is no bid side, but they are throwing out some bids to see if anyone bites.”
“If you had to buy bonds [Friday], you had to pay up,” Smolik wrote. “Secondary offerings were very thin as many dealers have simply pulled offerings until January trading begins. Those who offered bonds did so in a very protective manner. And, like every day this week, if you had to buy bonds, you had to reach.”
This week, the municipal market can expect $543 million of new issuance, down from last week’s revised $3.95 billion. Roughly $323.3 million of negotiated deals are expected, down from last week’s revised $3.6 billion. In the competitive market, about $219.7 million is expected, down from last week’s revised $305.4 million.
On the negotiated calendar, RBC Capital Markets is expected to issue $171 million of Texas Tech University System Board of Regents bonds Thursday.
On the competitive calendar, the largest deals are expected to come to market Thursday with the Suffolk County, N.Y., Water Authority issuing $83.64 million of revenue bonds and the Texas A&M University System Board of Regents issuing $65 million of bonds.
Rounding out the five biggest deals for the week, the Little Rock, Ark., School District will issue $44 million of bonds in the competitive market Wednesday. Stone & Youngberg will price $40 million of California’s Bonita Canyon Public Facilities Finance Authority debt.
Weekly reporting municipal bond mutual funds had a net inflow of $1.1 billion during the period ending Dec. 28, following a $766 million inflow the week before, Lipper FMI reported.
The results represent the fourth straight week of inflows, according to the fund tracker. The category represents about 73% of all muni bond funds because it excludes those that report monthly.
The four-week moving average for all muni bond funds — which includes the monthly reporters — rose to a $961 million net inflow from an $828 million inflow the previous week.
Taxable bond funds that report weekly had a $1.9 billion net inflow, after a $1.5 billion inflow the week before.
Weekly reporting equity funds had an inflow of $2.4 billion, after a $1.3 billion inflow the previous week.
Looking ahead to the rest of this year, J.R. Rieger, vice president of fixed-income indexes at Standard & Poor’s, said he expects the muni curve to steepen in 2012.
“Fed actions and flight-to-quality dynamics have been positive factors for long bonds pushing prices up,” he said, adding the yield differential between the one-year bond and the nine-year bond is 226 basis points on the S&P indexes.
“That is on the low end of the range for that spread for the last year,” Rieger said. “As a result, I’m keeping my eyes peeled for steepening of the curve in 2012.”
