Muni Yields, Following Treasuries' Tone, Weaken Yet Again

Slowly rising Treasury yields and modest trading pulled municipal bond yields higher Monday.

The Treasury market continued to reel from Friday’s employment number, which beat expectations. And without Treasuries following through over the weekend from Friday, it proved difficult for the muni market to find its footing, traders said.

Market participants remain nervous about the possible timing surrounding the Federal Reserve’s tapering its bond purchasing and rising rates. Munis battled that miasma of uncertainty all day, traders said.

On a fairly quiet day in the secondary market, there was a continued bias to the downside, a trader in Los Angeles said. A couple of institutions with redemptions applied some pressure to the market as they tried to raise cash, but it wasn’t enough.

“I’m not finding a lot of love out there,” he said. “Treasuries set the tone. If they’d had a firmer footing to them, we might have felt a little better. We’re still reacting to where Treasuries were last week during the selloff on Friday.”

Still, a busy primary market is expected for this week, led by an $877 million sale Morgan Stanley will hold for Rutgers University and an $800 million New York City Transitional Finance Authority financing, for which Loop Capital Markets Monday held a retail pricing.

The TFA bonds are rated Aa1 by Moody’s Investors Service and triple-A by Standard & Poor’s and Fitch Ratings. They are callable at par in 2023.

Yields range from 0.60% with coupons of 3.00% and 4.00% in a split maturity in 2016 to 4.10% with a 4.00% coupon in a split maturity in 2043. Credits maturing in 2015 were offered in a sealed bid. There were no retail orders for debt maturing in 2027, 2028, 2030 through 2032, 2038 and 2043. A second retail order period is expected Tuesday.

There should be approximately $7.87 billion of new issuance this week, according to Ipreo LLC and The Bond Buyer. That compares with the revised $4.52 billion that actually came to market last week, according to Thomson Reuters.

Even with the  uptick, there’s little in the way of real size coming in, the trader in Los Angeles said. “There’s not a whole lot of direction coming from the primary,” he said.

Muni participants anticipated around $34 billion in reinvestment and rollover dollars to reach the market in June, followed by a comparable figure in July. One week into the month the effect, if any, is muted traders say.

“People have been talking about the reinvestment this month being substantial,” a trader in New York said. “But quite honestly, it certainly hasn’t materialized.”

Typically, the large rollover months of June and July are good for business, a trader in Chicago added. Thus far, June has started out with a real lag.

“People are maybe just waiting on the sidelines to reinvest it,” the Chicago trader said. “Some of it needs to be reinvested because some of the trust departments and some of the investment managers are supposed to keep so much in credits. They seem to be coming in a bit slower than usual.”

Looking ahead, the technical environment for munis appears rather mixed, Peter DeGroot, muni strategist at JPMorgan, wrote in a research report. The marked jump in outflows has softened an otherwise positive net supply picture.

“If this past week’s mixed to weaker economic readings are indicative of slower growth and either lower rate volatility or lower future absolute rates, we believe fund outflows would mitigate, paving the way for solid municipal performance,” DeGroot wrote. “If rates were to resume their volatile path higher, market liquidity would likely take a turn for the worse. Obviously, the aforementioned view assumes an environment free of an unexpected credit event or upside surprise in issuance.”

Some recent economic data that indicate economists may be lowering second quarter 2013 GDP estimates reinforces a lower near-term rate position. The unpromising numbers include weaker-than-expected real consumer spending figures, and downward revisions to retail sales, as well as manufacturing surveys that show a lack of momentum in the factory sector.

The May employment report did help to alleviate concerns of a spring slowdown, but failed to point to the likelihood of robust growth moving forward. The possibility that the Federal Reserve will announce a tapering of its bond purchasing program will probably continue to keep rates volatile this year, particularly around the release of the employment numbers and any communiqués from the Fed.

“That said, we also believe that Fed tapering is nearly fully priced into current Treasury yields given current growth and inflation expectations,” DeGroot wrote. “We continue to expect a Fed tapering announcement at either the September or December meeting, with marginally higher probability of a December announcement.”

The market was slow to wake up early in the day and never really found its footing, the New York traders said. Participants saw no bid side from customers, and the Street didn’t have a bid for other interdealer participants.

“The market’s pretty illiquid,” he said. “The Street’s not necessarily in bad shape. But the market has experienced a reasonable amount of outflows over the past two weeks. That hasn’t helped.”

Outflows jumped to $1.47 billion for the week of June 5, from $157 million the previous week. The unexpected surge in outflows cast a pall over the market heading into last weekend.

The muni market mostly weakened Monday, according to an industry read. Yields up to two years were steady. Those beyond the front end of the curve were three to seven basis points higher.

Yields on the Municipal Market Data scale ended Monday’s session as much as seven basis points higher. The triple-A 10-year yield rose six basis points to 2.19% and the 30-year yield vaulted seven basis points to 3.41%. The two-year was unchanged at 0.30% for the sixth session.

Muni yields on the Municipal Market Advisors 5% scale closed out as much as six basis points higher. The 10-year yield climbed five basis points to 2.25% and the 30-year yield jumped five basis points to 3.51%. The two-year ticked up one basis point to 0.37%.

Treasuries weakened throughout the day’s session. The benchmark 10-year yield rose five basis points to 2.21%; the 30-year yield also jumped five basis points to 3.37%. The two-year yield inched up two basis points to 0.33%.

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