The tax-exempt market finished September on a positive note, leaving yields almost 50 basis points lower for the month, for the first gain since April.
The 10-year Municipal Market Data yield slid 48 basis points in September, while the 30-year yield fell 37 basis points. In April the 10-year MMD yield slid 20 basis points and the 30-year yield dropped 25 basis points.
Similarly, the Bank of America Merrill Lynch U.S. Municipal Securities Index posted a positive 2.32% return for the month of September, the first positive month since April when the index returned 1.129%. In May, June, July, and August, the index had negative returns of 1.28%, 3.187%, 1.063%, and 1.644%, respectively.
The positive performance in September was not enough to reverse losses in July and August as the index returned negative 2.689% for the third quarter.
Traders said the positive momentum in September should carry on into October if lower supply trends continue. Long-term issuance in September, at $19.4 million, was the lowest monthly volume since January 2012 when municipal bond issues totaled $17.5 billion.
The first week of October is expected to kick off on a similar note with only $3.46 billion in new issues, including $2.94 billion in the negotiated market and $522.3 million on the competitive calendar.
Still, the last trading session of the month and quarter ended with light trading as lower yields, and an impending government shut down, kept buyers out of the market. “It’s very quiet,” a New York trader said, adding that the lack of transactions was typical for a Monday. “Retail doesn’t care,” a second New York trader said. “They haven’t cared for a while but today they really don’t care. There is nothing going on.”
This trader blamed a lack of supply. “It’s weaker just because you want to get a trade done. But it’s a lack of confidence in the market that is encouraging that. People got used to higher yields a couple weeks ago and now they have a hard time grasping these yields.”
Puerto Rico was also on investors’ minds Monday after the commonwealth said late last week it plans to expand its ability to issue sales tax-backed COFINA bonds. The government said it will introduce a bill to increase the sales and use tax percentage allocated to COFINA to 3.5% from 2.75%. Tom Graff, head of fixed income of Brown Advisory, said generally this was a credit positive and while spreads on general obligation debt have widened, COFINA spreads remain relatively tight.
“COFINA spreads haven’t changed much on the news of the restructuring,” Graff said. “The feeling is they are trading around where they were, but the GOs are wider.”
Graff said he feels safer holding COFINA bonds than the GOs and they are more liquid. “I always prefer to have explicit revenue than a vague more obligation. So I’m positive on it.” Because the bonds are more liquid, mutual funds have sold COFINA bonds before the GOs as they raised cash to meet redemptions. That selling pressure has pulled prices down to 80 and 90 price range, but is still much higher than the 60 to 70 price range on some of the GOs.
Other investors are much more bearish on the commonwealth. “The potential systemic risk posed by the Puerto Rico situation may also be contributing to the current perception of munis as a riskier investment,” said Triet Nguyen, managing partner at Axios Advisors. “Although other states have gotten into trouble before, we really don’t have any historical precedent involving a quasi-sovereign entity with as broad a market impact as Puerto Rico. In Puerto Rico’s case, rightly or wrongly, the market is telling us a restructuring is in the cards, with many Puerto Rico issues trading on a dollar price rather than yield basis. The endgame here could well be a permanent shift in ownership of PR paper, away from the traditional muni funds and toward high yield funds and crossover buyers.”
In the secondary market Monday, trades compiled by data provider Markit showed a mix of strengthening and weakening.
Yields on California 5s of 2027 rose seven basis points to 3.75% and Dormitory Authority of the State of New York 5s of 2043 increased two basis points to 4.49%.
Yields on Cambridge, Mass., 5s of 2020 and El Camino, Calif., Community College District 5s of 2037 rose one basis point each to 1.75% and 4.34%, respectively.
Other trades were stronger. Yields on Ohio’s Buckeye Tobacco Settlement Financing Authority 6.5s of 2047 slid three basis points to 8.12% and New York 5s of 2033 fell one basis point to 4.15%.
Yields on Chicago Metropolitan Water Reclamation District 5.25s of 2032 and Texas’ Lone Star College System 4.5s of 2038 fell two basis points each to 4.50% and 4.63%, respectively.
On Monday, yields on the triple-A Municipal Market Data scale ended steady to one basis point higher. The two-year was steady at 0.36% for the seventh consecutive session and the 10-year closed unchanged at 2.54% for the fourth session. The 30-year yield increased one basis point to 4.12%.
Yields on the Municipal Market Advisors scale also ended steady to one basis point higher. The two-year was steady at 0.54% for the eighth consecutive trading session and the 10-year closed flat at 2.70% for the third session. The 30-year yield increased one basis point to 4.26%.
Treasuries were mixed Monday as a government shutdown at midnight Monday evening approached. The benchmark 10-year yield slid one basis point to 2.62% while the 30-year yield increased one basis point to 3.70%. The two-year was steady at 0.34%.
