Market Post: Munis Weaker, But Not Due to Detroit

The municipal market started Friday unaffected by Detroit's Chapter 9 bankruptcy filing Thursday afternoon, the biggest in history.

The news, so far, has had little impact on trading, as the city's struggles had long ago been priced into the market, traders said.

Still, the market felt weaker to start the day, a trader in New York said.

"The market, in general, feels a little weak," he said. "There was a fair amount of issuance this week, a fair amount out for the bid in the secondary … a couple of guys trying to get a little bit lighter here. But this is no surprise to anybody. If you didn't know this was coming, you probably shouldn't be in the business."

Signs of weakness on the yield curve can be traced to 10 years on out, he added.

Tax-exempt yields should largely sidestep any fallout from Detroit, market watchers said.

"Most importantly, in our opinion, is that we do not see this as a contagion event that will spill over to the rest of the municipal market," Tom Kozlik, a municipal credit analyst for Janney Capital Markets, wrote in a research brief.

"Detroit's bankruptcy is unlikely to drive broader munis cheaper, although this filing follows months of price losses," Muni Market Advisors tweeted shortly after the news of the filing broke.

Next week's calendar should fall on the lighter side, according to estimates from Ipreo LLC and The Bond Buyer. Potential volume for next week is expected to total $5.54 billion, down from total sales of $8.32 billion this week.

That breaks down into $4.30 billion scheduled for negotiated sale next week, versus a revised $6.33 billion that were sold this week. Bonds scheduled for competitive sale next week total $1.24 billion, compared with $1.99 billion sold this week.

The largest deal of the week appears to be $750 million of Bay Area Toll Authority San Francisco Bay Area subordinate toll bridge revenue bonds that Bank of America Merrill Lynch expects to price.

Tax-exempt yields started the session mostly higher, according to one market gauge. They were steady through six years. Thereafter, yields have risen as much as nine basis points, with the largest increase falling beyond 22 years.

The 10-year triple-A tax-exempt skipped up two basis points Thursday to 2.63%, according to the Municipal Market Data scale read. The 30-year yield increased to 4.03%; the two-year steadied at 0.43% for a second session.

Almost all yields on the Municipal Market Advisors 5% scale rose Thursday. The 10-year yield increased two basis points to 2.81%. The 30-year yield climbed three basis points to 4.13%. The two-year held at 0.53% for the second consecutive day.

Treasury yields started Friday slightly firmer beyond the front end of the curve. The benchmark 10-year yield fell two basis points to 2.52%. The 30-year shaved three basis points to 3.60%, while the two-year yield held steady at 0.31%.

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