The municipal market trudged along on Monday, hindered by negative credit headlines and investor reluctance following the 13th straight week of outflows from mutual bond funds. Vacationing traders the week before Labor Day added to the level of inactivity.
“The municipal bond market remains disorderly, unable to stabilize itself amid fund selling pressure, negative credit headlines, and end-of-summer illiquidity,” Municipal Market Advisors wrote in a weekly outlook report Monday.
Market participants echoed those sentiments.
Liquidity and credit was a major issue in the market Monday, a New York trader said. Chicago bonds struggled as municipal mistrust from Detroit spilled over into Illinois, where investors perceive some credit risk, and unease over Puerto Rico’s economy strained performance of those bonds, he said.
“It doesn’t help when Puerto Rico makes the front pages and people see statements from mutual funds,” a trader in Dallas said. “That’s keeping investors at bay, no doubt.”
On Saturday, Barron’s magazine said Puerto Rico’s debt crisis the story cited an estimate of nearly $70 billion from the commonwealth may cripple the country’s efforts to revive its economy.
“Puerto Rico is in disarray,” one trader in New York said. “It’s been a mess for a while and it’s even worse. It’s been a struggle to move Puerto Rico product already and it’s only going to be worse going forward.”
Puerto Rico bonds traded with yields as high as 8%, he said.
Another trader in New York said renewed skepticism over the weekend about the health of Puerto Rico’s economy led to retail investor anxiety.
“We’re getting some calls from people asking what’s going on,” he said. “Right now we’re just going to have to wait and see where that stuff trades, it could be of concern.’’
The secondary market is ill-prepared to handle a wave of selloffs after a summer of rising yields, thin dealer balance sheets, and an uncertain endgame by the Fed, according to the MMA report.
“There are still concerns over where we’re headed,” said a trader in New York. “Outflows just add to it if you’re on the fence, you hold tight and see where it goes. This morning is back to school and back to reality.”
The coming week may prove to worse than the illiquidity shown in June, MMA said in its report.
“With negative headlines on Puerto Rico over the weekend, the bid-side for PR names has collapsed and retail-related selling has already begun. Plus imminent developments in Stockton, San Bernardino, and Harrisburg (not to mention Detroit) mean news headlines will not be constructive,” the report said.
One trader in New York said new issue volume this week could revive appeal for some investors.
“The slow day is a combination of feeding into the holiday weekend as well as waiting for more activity tomorrow and Wednesday, with long-end California and short-end Texas issues,” the person said. “There’s certainly a full plate.”
California will bring $764 million of competitive general obligation bonds on Tuesday. The deal is structured with $560 million of GO refunding bonds maturing from 2014 to 2024, in 2028, and from 2030 to 2033, as well as $205 million of new-money debt maturing in 2022, from 2024 to 2027, and in 2029. Proceeds will finance a variety of infrastructure projects.
“The lazy days of summer are officially here,” Jody Lurie, a research assistant at Janney Capital Markets said in a daily report. “The primary market was quiet last week: the time of year coupled with Fed events caused many companies to shy away from issuance. In turn, only $11 billion priced in the US corporates market.”
Lurie said the rising level of absences on Wall Street and the volatility in treasury rates throughout last week led to a slowdown in secondary trading volumes. Selling pressure on high yield credits still exists, Lurie said.
New issue calendar this week is expected to be around $5 billion, an amount that’s on the high side for a pre-holiday week, Janney said in the report. The report noted Texas A&M’s expected $352 million negotiated offering as well as the California competitive sale.
Treasuries gained from Friday, with the benchmark 10-year yield down four basis points from 2.79%. The 30-year yield fell three basis points to 3.77%, while the two-year yield slumped just one basis point to 0.38%.
Yields on the triple-A Municipal Market Data were steady from 2014 out to 2035 by the end of the day. Yields in 2036 slid by a basis point, while those from 2037 to 2040 were unchanged. Out from 2041 to 2043, they fell one basis point.
Yields on the Municipal Market Advisors scale were unchanged across the entirety of the curve.
In the secondary market, trades compiled by data provider Markit showed strengthening. Yields on Pennsylvania turnpike bonds with a 5.125% coupon maturing in 2040 fell two basis points from 5.39% to 5.37%. Yields on Los Angeles water system revenue bonds with a 5% coupon maturing in 2042 fell five basis points to 4.84%.
New Jersey turnpike revenue bonds maturing in 2030 with a 5% coupon fell three basis points to 4.78% from 4.81%, according to Markit.
In other economic news, durable goods orders, which reflect new orders placed with domestic manufacturers, fell for the first time in three months in July. New factory orders for durables dropped 7.3% in July, compared with a gain of 3.9% the month before.
