The municipal market weathered a slow summer Friday, ending weaker beyond the short end of the yield curve following Detroit’s bankruptcy filing.
Tax-exempt yields started the morning higher as the market digested the news and only continued their ascent as the day progressed. And while munis took it on the chin, those of Treasuries rallied across the curve.
Traders initially said the market wasn’t affected by Detroit’s
But the mood across the muniverse shifted as yields rose. Still, Detroit paper, the primary focus on the day for the market, showed no aberrations in prices, analysts at Interactive Data wrote in a research brief.
“Today’s trading and dealer quotes of Detroit bonds generally appeared to be within range of recent days prior to the filing, implying that the bankruptcy was widely anticipated by the Street,” they wrote. “There have been over 200 trades of Detroit paper as of midday, though all but one of the trades have been oddlots.”
Other in the industry sought to assuage any fears in the market that may spread from Detroit.
“Ultimately, it’s important for market participants to understand that Detroit is the exception and not the rule,” Peter Hayes, head of BlackRock’s muni bond group, wrote in a research brief. “This is first and foremost a Michigan issue, not a systemic municipal market issue.”
Even though Detroit captured the headlines, it wasn’t the only cause behind the selloff.
The day was marked by light trading activity, a trader in Chicago said. And investor demand continues to struggle mightily. Muni bond mutual funds had their eighth consecutive week of heavy outflows, at $1.56 billion, Lipper FMI numbers showed.
“Things are a little softer, due to the fact that the market is slow today and the Detroit thing is a no-win,” he said. “Overall, our market has held in this week. Actually, we rallied back a little bit, in spite of these redemptions.”
In addition, there was a fair amount of issuance this week, and a fair amount out for the bid in the secondary, a trader in New York said in the morning. Some dealers attempted to move some inventory out the door before the weekend, he added.
In the secondary, trades compiled by data provider Markit showed weakening, some by as much as seven basis points in 5% coupon bonds.
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.
Leading the negotiated market, Bank of America Merrill Lynch expects Wednesday to price the largest deal of the week: $750 million of Bay Area Toll Authority San Francisco Bay Area subordinate toll bridge revenue bonds.
Maryland follows in the competitive market when it auctions $435 million of general obligation state and local facilities loan bonds, also expected on Wednesday.
Tax-exempt yields ended the week higher beyond the front end of the curve, according to one market gauge. They were steady through six years. Thereafter, yields rose as much as 11 basis points, with the largest increase falling beyond 20 years.
The 10-year triple-A tax-exempt rose four basis points Friday to 2.67%, according to the Municipal Market Data scale read. The 30-year yield vaulted 11 basis points to 4.14%; the two-year held at 0.43% for a third session.
Most yields on the Municipal Market Advisors 5% scale weakened Friday. The 10-year yield increased three basis points to 2.84%. The 30-year yield jumped eight basis points to 4.21%. The two-year steadied at 0.53% for the third straight day.
Treasury yields ended the week stronger the curve. The benchmark 10-year yield fell six basis points to 2.48%. The 30-year shaved seven basis points to 3.56%, while the two-year yield inched down one basis point to 0.31%.
