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Market Close: Yields Rise Slightly on a Slow Session

Sluggish activity in the primary and secondary left most prices in the municipal market slightly weaker Monday.

Ahead of a sturdy calendar, business was steady, marked by retail investors “pecking away” on deals, a trader in Texas said.

“From here, watching where some of the deals from last week are trading, it looks like the market is still in pretty good shape,” he said.

If investors showed particular interest in any part of the market, he added, it was in zero-coupon bonds, particularly those from California. Those spreads appeared to tighten.

“People are getting some extra yield without having to extend duration or go down in quality,” he said. “But if you look at [Municipal Securities Rulemaking Board] reports, you can track percentages of what kinds of coupons are trading. You’ll see that zero coupons normally average around 2%; they’re up in the 6% range.”

By some accounts, investors waiting for the coming calendar and armed with cash were expected to light up the secondary market with activity this week, starting Monday. But instead, traders reported little buying.

The market will see rollover cash from bond redemptions, maturing bonds, and refunded debt expected to total $27 billion for the month of December. There have also been healthy inflows to muni bond mutual funds.

Collectively, the environment appears decidedly pro-bond, a trader in Chicago said.

“There still are solid inflows, and we have all this money coming due,” he said. “The expectation with a lot of participants is that we’d see a lot of follow-through in the secondary, and we just haven’t seen it.”

There were a lot of customer bid-wanteds, he added. But from the demand perspective, there was little activity compared with that seen over the past couple of weeks.

“People aren’t buying bonds in the secondary for the middle-market and retail-type customers,” the Chicago trader said. “It’s a little befuddling.”

But this makes sense, said the trader in Texas, as much of the redemption money was probably put to work in advance last week. “When-Issued” paper that’s purchased doesn’t settle until after one or two weeks in most states, he said. Thus, traders don’t pay for those deals until the money reaches their accounts.

“So, a deal that was priced last week, for example, could be some of that December money going to work, because it doesn’t settle for two weeks; that’s part of that, too,” he said. “You’ve got WI paper, stuff that doesn’t settle until the middle of December. But the trader knows he’s going to have the money so he puts his client in the deal.”

This week, an estimated $8.36 billion of new volume is expected to arrive, paced by two New Jersey Transportation Trust Fund Authority deals that total more than $1.2 billion. Last week, a revised $6.75 billion reached the market, according to Thomson Reuters.

Retail investors took their shots at one of the week’s larger issues Monday as Wells Fargo Securities priced $817.4 million of Texas Transportation Commission state highway improvement general obligation bonds. The bonds are rated Aaa by Moody’s Investors Service, AA-plus by Standard & Poor’s and AAA by Fitch Ratings.

Yields ranged from 0.88% with a 5.00% coupon in 2019 to 2.23% with a 5.00% coupon in 2032. Credits maturing in 2028 through 2031, 2036 and 2042 were not offered to retail.

The bonds are callable at par in 2022. Wells Fargo should hold pricing for institutions on Tuesday.

For December, the first two weeks represent the optimal time to come to market before the holidays arrive, said John Hallacy, a managing director and manager of municipal bond research at Bank of America Merrill Lynch. The timing likely influenced issuers participating in this week’s robust calendar.

“Rates have been a little bit more volatile, but then we rallied back to 40-year lows here,” Hallacy said. “It’s hard to pick the bottom, but here we are at the bottom. So, if you’ve got something to do, then why not [do it now]? You don’t want to run into the headwinds of the fiscal cliff and sequestration and everything else that’s going on.”

What’s more, issuers must comply with spend-down rules, he added. Under the tax code, muni issuers must spend bond proceeds within a certain period — the temporary period is usually about three years on most projects — so the money doesn’t sit unused.

“So you can’t get too far ahead of when you really need the funds,” he added.

With today’s market conditions, investors would be more inclined to look in the intermediate range to somewhat farther out along the yield curve, according to Hallacy.

Tax-exempt yields climbed slightly at Monday’s close, according to a market read. Triple-A yields beyond six years on the curve ticked up one basis point.

Muni yields ended Monday’s session higher beyond the front end of the curve, following almost a week-long rally. The 10-year yield rose to 1.48%, one basis point above the record low it set Wednesday, according to the Municipal Market Data scale read.

The 30-year yield also closed one basis point higher at 2.48%, dangling above its record low. The two-year held at 0.30% for the 46th straight trading session.

The Treasury yield curve opened the week mostly higher across the front and intermediate sections. The benchmark 10-year yield climbed one basis point to 1.63%.

The two-year yield inched up one basis point to 0.27%. The 30-year yield trimmed its losses on the day, slipping one basis point to 2.80% after jumping four basis points in the morning.

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