The tax-exempt market ended Monday's trading session in what is becoming typical fashion, with unchanged yields during a light trading session.
Most traders said the markets were focused on the seventh day of the government shutdown, the Oct. 17 debt ceiling, and an increase in issuance expected to start pricing Tuesday.
"The market is slow and flat," a New York trader said. "Everyone is waiting and seeing about the government shutdown. New deals are slim."
One Chicago trader said the market struggled to get excited about anything. "New issues are keeping people's focus but only barely," he said.
Indeed, issuance is expected to pick up this week to $3.76 billion, up from last week's revised $2.77 billion. On the negotiated calendar, $3.04 billion should be issued, up from last week's $2.21 billion. In the competitive market, $724.1 million is expected to be issued, up from last week's revised $558.8 million.
Trading volume was down 34.4% on Monday from the average of the previous five Mondays despite a reasonable amount of dealer buying, a second Chicago trader said.
After Thursday's downgrade of by Moody's Investors Service of Puerto Rico's Sales Tax Financing Corp. senior lien bonds to A2 from Aa3, yields traded flat Monday afternoon. "They cheapened up immediately after the downgrade, but have stabilized since," the Chicago trader said.
One CUSIP of COFINA 5s of 2022 yielded between 4.90% and 4.923% on Monday in block-size trading.
Odd-lot trades were more volatile, the New York trader said. "They are all over the place. There's a five-point range sometimes with odd-lots."
Indeed, in odd-lot trading of COFINA bonds, yields rose after the downgrade. On Monday, a customer sold to a dealer 5s of 2024 at 6.22%, over 90 basis points higher than where the bonds were sold Wednesday.
"The downgrade was for the senior lien COFINA bonds only, and Moody's said a large part of the downgrade was because they couldn't justify a six-notch difference between the senior liens and the GOs," said Steve Shutz, portfolio manager at Brown Advisory. "The downgrade was based on overall economic contraction for the island and less specifically for the COFINA revenue pledge."
Shutz said following the downgrade, spreads on COFINA senior lien bonds have widened roughly 40 basis points in the intermediate part of the curve. The subordinate bonds have not seen material widening in spreads since the senior lien downgrade.
"Standard & Poor's came out with a negative outlook, there was the proposal to expand the pledge that's allocated to COFINA, and the Moody's downgrade. Since all three of those newsworthy releases, volumes have dropped off," Shutz said. "Fund flows have moderated so there is less of a necessity for fund managers to find liquidity in the near term." Trading volume has also dropped off as investors await the structure of the proposed third-lien borrowing, Shutz said.
Shutz said he is interested in COFINA bonds that mature in the intermediate range of the curve. "The coverage is much stronger for shorter and intermediate bonds. Even with the contraction in the overall economy, the strong legal pledge from this dedicated revenue source and with revenues that are legally separate from the commonwealth, we continue to believe it's a very solid credit."
In the general market, the drop in yields over the past month has given issuers the chance to come back to market with refunding deals that had previously been postponed after the summer selloff. The second trader in Chicago said a backlog of Michigan limited tax general obligation bond deals is building. "A lot of refundings are starting to pop into the sight of Michigan municipalities who were sidelined due to the Detroit Chapter 9 fears and lack of supply hindering the overall market of Michigan paper," he said.
"Battle Creek was the first sizeable deal and it went really well, all things considered. There was a lot of interest and no point penalty," he said. "Michigan is picking up a lot of these small issues that are testing the market."
In the secondary market Monday, trades compiled by data provider Markit showed a mix of strengthening and weakening.
Yields on Sacramento, Calif., Municipal Utility District 5s of 2027 and California Pollution Control Financing Authority 5s of 2045 fell two basis points each to 3.59% and 6.15%, respectively.
Yields on New York 5s of 2036 and Alabama State Public School and College Authority 5s of 2022 slid two basis points each to 4.33% and 2.61%, respectively.
Other trades were weaker. Yields on Penn Delco, Pa., School District 5s of 2038 increased three basis points to 4.69%.
Yields on New York City Trust for Cultural Resources 5s of 2033 and Hays, Texas, Consolidated Independent School District 5s of 2021 increased one basis point each to 4.24% and 2.30%, respectively.
On Monday, yields on the triple-A Municipal Market Data scale were unchanged for the second session. The 10-year and 30-year yields were flat for the fourth session at 2.54% and 4.11%, respectively. The two-year was steady for the fifth session at 0.37%.
Yields on the Municipal Market Advisors benchmark scale were also unchanged. The 10-year yield closed unchanged at 2.70% for the second session and the 30-year was flat at 4.26% for the fourth session. The two-year closed unchanged at 0.54% for the 13th session.
Treasuries ended mostly firmer Monday. The benchmark 10-year yield slid one basis point to 2.64% and the 30-year yield dropped two basis points to 3.71%. The two-year yield rose one basis point to 0.35%.
