Strong economic news, light activity and a fade in Treasuries hamstrung the municipal market Monday.
Tax-exempt prices for maturities beyond the front end of the yield curve took on water, sinking by as much as several basis points at the long end.
“You get the Treasury market down as much as it was on the long end and munis just never get started,” a trader in San Francisco said. “The strong economic numbers that came out this morning pushed it down and kept it down.”
Traders saw higher-than-expected bid-wanteds on the day, but no indications of true selling pressure.
“At some point, when Treasuries are up, fund managers are comfortable letting their cash drift out and let their duration get longer,” he added. “But as soon as that turns, people want to cover that. They don’t want to get caught in a really negative cycle with no cash. That’s what we saw today: a lot of bid-wanteds, guys going out and selling stuff to replenish that cash.”
The Institute for Supply Management reported in the morning that the overall economy expanded for the 54th consecutive time and the manufacturing sector swelled for the sixth straight month.
By midday, mid- to long-end Treasuries slid several basis points while muni yields tried to adjust, traders said. But market gauges showed weakening around the long end of the muni yield curve that was more pronounced than what traders saw.
“Activity is a little light right now,” a trader in Illinois said around noon. “But we’re not really expecting a selloff here.”
The lack of total volume tempered expectations of a decline in yields somewhat, a trader in Florida said. Consequently, muni yields were holding better than they should have.
“The marketplace has some sensitivity to the calendar this week and the expectation is we’ll probably have to adjust a little to consume the deals that are coming,” the trader said.
The market
Citi is expected to lead with issuance of $1.2 billion of New York Tobacco Settlement Financing Corporation bonds. Most of the largest deals are scheduled to arrive near the end of the week.
Demand, as measured by municipal bond mutual fund flows, continued to struggle for a 27th straight week. Outflows from muni bond funds totaled $870 million for the week of Nov. 27, Lipper FMI numbers showed. That compared with outflows of $770 million for the prior week.
Long-term muni bond funds suffered much of the hemorrhaging, at $632 million, the ninth week of outflows. High-yield muni funds suffered outflows of $191 million.
Illinois legislators last week announced a proposal to overhaul the state’s underfunded pension system. The plan would bring Illinois’s pension funds to fully funded status by 2044 if implemented as described.
But the legislature will probably adjust the proposal draft, which was announced Sunday, and is expected to be vetted Tuesday, prior to approval, Matt Fabian, managing director at Municipal Market Advisors, wrote in a research report. And Illinois has failed several times to advance otherwise reasonable reform plans in the past, he added.
Through year end, Illinois bonds may be set to outperform, Fabian wrote. “From a market perspective, we expect that trading in state of Illinois bonds will reasonably improve in the near term as the proposal and associated political momentum imply reduced risk of rating downgrades near term,” he wrote. “However, also noting reasonable investor cynicism over the ultimate outcome, and a more pronounced downside for the state’s budget should this reform fail, gains will be limited if crossover investors (hedge funds) fail to participate in a meaningful way.”
Trades on Illinois paper Monday had yet to show a strong reaction, the Illinois trader said.
“I’ve seen a few trades go through that looked quite a bit stronger than what I expected,” he said. “It’s mostly in the odd-lot stuff. I haven’t seen any big block trades.”
In the secondary, trades compiled by data provider Markit showed mostly weakening.
Yields on Golden State, Calif., Tobacco Securitization Corp 5.75s of 2047 rose six basis points to 7.88% and California Statewide Communities Development Authority 5s of 2042 climbed three basis points to 5.11%.
Yields on Columbus, Ohio 5s of 2023 and California Health Facilities Financing Authority 5s of 2052 inched up one basis point each to 2.85% and 5.27%, respectively. Other trades were firmer. Yields on New York City Transitional Finance Authority 5s of 2020 slipped two basis points to 2.08%.
Muni yields fell past the first three years of the curve by up to four basis points, according to the Municipal Market Data scale read. Maturities past 22 years had the biggest yield increases.
The 10-year triple-A MMD yield rose two basis points to 2.67%; the 30-year yield jumped four basis points to 4.14%. The two-year held for the 12th straight session at 0.33%.
Yields on the Municipal Market Advisors benchmark scale also ended last session weaker. The 10-year yield inched up one basis point to 2.72% and the 30-year yield rose three basis points to 4.37%. The two-year yield remained at 0.37%.
Treasuries weakened past the front end of the yield curve. The benchmark 10-year yield rose six basis points to 2.81%. The 30-year increased four basis points to 3.86%. The two-year was at 0.29%.
