The tax-exempt market ended softer every session this week as selling pressure from municipal bond funds and illiquidity pushed bond prices lower.
Demand for municipal bonds has been waning since May because of concern over rising interest rates, the possibility of the Federal Reserve tapering its $85 billion-a-month bond purchasing program, the high profile bankruptcy filing of Detroit, and 13 consecutive weeks of muni bond fund redemptions.
In the week ended Aug. 21, municipal bond funds that report weekly recorded $2.14 billion in outflows, the largest withdrawal in August. Total assets in muni bond funds fell to $286 billion, extending a seven-week slide.
“Overall supply was light this week and most of it came from two big deals, and still the market was softer by nine to 10 basis points,” said Stephen Winterstein, chief municipal strategist at Wilmington Trust Investment Advisors. “We see strong demand on the front end of the curve. But beyond 12 years, demand is spotty.”
The two largest deals of the week, $849.2 million of New Jersey Transportation Trust Fund Authority and $443 million Dormitory Authority of the State of New York bonds got better prices on bonds bonds maturing within 10 years.
Bank of America Merrill Lynch priced New Jersey’s TTFA and raised yields two basis points on bonds maturing between 2022 and 2026 from preliminary pricing. Yields were lowered three basis points on bonds maturing in 2039 and 2044.
B of A Merrill also priced DASNY and accelerated the institutional sale a day to take advantage of demand. In repricing, yields were lowered one and three basis points on bonds maturing in 2038 and 2043 after lowering yields as much as 10 basis points on bonds maturing in 2016 and 2017 and five basis points on bonds maturing between 2018 and 2024 and in 2043 from retail pricing.
“People are nervous about the fallout of the last couple months, the tapering comments, negative fund flows, and the possibility of supply picking up in September,” Winterstein said. “There is a cautious tone and this market feels nervous.”
In the secondary market, Winterstein said demand is also focused on shorter-maturing bonds. “Trading volume is on the short end of the curve. There seems to be a firmer bid inside seven years and with the nervousness of the market on the buy side, once you get beyond 10 or 12 years, you see volume slow.”
Trading volume was much higher this week than last week, according to Interactive Data.
On Monday, there were 47,172 trades with a par value of $5.725 billion, up from the previous Monday’s 41,152 trades with a par value or $5.087 billion. Retail participation of par value held steady at 45%.
Tuesday, activity rose further. Trades increased to 54,131 with a par value of $8.778 billion from the previous Tuesday’s 46,721 trades of $7.469 billion. Retail participation of par value traded held flat at 37%.
Wednesday, there were 54,199 trades of $9.959 billion. That is up from the previous Wednesday’s 50,857 of $8.476 billion traded. Retail participation of par value fell to 35% from 38%.
For the week through Thursday, the 10-year triple-A Municipal Market Data scale rose six basis points to 2.94% and the 30-year yield climbed seven basis points to 4.46%. The two-year was steady for the week at 0.43%.
The 10-year Municipal Market Advisors yield rose seven basis points to 3.09% and the 30-year yield climbed six basis points to 4.55% for the week through Thursday. The two-year was steady at 0.55%.
Treasuries were mixed. The two-year yield rose two basis points for the week through Friday morning to 0.38%. A flight to safe haven assets pushed the 10-year down two basis points for the week to 2.82% and the 30-year yield down five basis points to 3.81%.
