The market for tax-exempt municipal bonds was mostly unchanged Monday as trading activity was subdued by a very small new issues calendar ahead of the Christmas holiday.
Industry analysts pointed out that many traders are hesitant to buy bonds for trading purposes this late in the year. Liquidity is especially low in December after a challenging year, and it can be easy to get stuck holding the new purchase.
Yields were steady to somewhat softer on some parts of the curve, according to traders and data providers.
"There are some people going out there with bid-wanteds but for the most part it was quiet, moving sideways to slightly down today," a trader in New Jersey said in an interview.
The trader noted that he saw some demand as investors showed interested in short-call kicker bonds on New York debt.
Investors continued to look for opportunities to get out of losing positions before the end of the year, market participants said.
In an effort to curb tax expenditures on gains, bondholders may sell at a loss and use the money to add new paper to their portfolios.
The move can create some pressure on the market, and in a year with significant losses, the effect has been felt throughout the month, Municipal Market Advisor's Matt Fabian said.
"You're seeing a lot more of it this year," Fabian said in an interview. "Even if you can't necessary fulfill the purchase of a new bond, there are so many losses that it's been playing an active role."
For Fabian, managing director at MMA, the municipal market in 2013 will be remembered for its dearth of liquidity, marked by continual outflows through the second half of the year.
"Since June we've been swimming upstream," Fabian said. "The muni market was created to distribute bonds from issuers to investors and the flow of money reversed midway through this year."
Outflows from municipal bond mutual funds extended to their 30th straight week, with Lipper FMI reporting the departure of $1.71 billion for the week of Dec. 18. In the week prior, $1.90 billion left mutual funds.
"This is a one-way market, it doesn't work as well when things are going the opposite way," Fabian said.
Fabian said he expects many of the same challenges for municipals going forward into 2014, compounded by the imposition of new regulatory rules that will need to be navigated by issuers and underwriters.
Regulations such as the Securities & Exchange Commission's Municipal Advisor rule, the Volcker Rule, Basel III and the Internal Revenue Service's new issue price regulations may take a toll on the market as soon as the first half of 2014, Fabian said.
"Rules are putting pressure on underwriters and broker-dealers to maintain more capital, so there has to be a behavioral adjustment in the near term to better manage capital," Fabian said.
Issuance is expected to be nearly non-existent during the holiday week, with potential volume about $15 million, down from total sales of $2.80 billion in the week ended Dec. 20.
"All the deals that were hot came and went last week," a trader said. "This time of year people play it very close to the vest."
There are no competitive deals scheduled, after $765.4 million sold last week, based on figures by Ipreo, The Bond Buyer and Thomson Reuters.
News that the Federal Reserve would begin tapering of its quantitative easing policy has not had a prominent impact on munis since an immediate rise of a few basis points on Dec. 19, market participants said
"The second full day [Friday] of post-taper trading revealed just how many bets had been in place on the yield curve steepening into the FOMC announcement," Janney Capital Markets said in a report Monday.
Efforts by the government in Puerto Rico to reform the Teahcer's Pension System did not have a noticeable impact on the island's debt Monday, as traders said that, despite a few bid-wanteds, it was relatively quiet.
"Instinctively we have a negative reaction to more debt coming out of the burdened Commonwealth," Janney said. "But if use of proceeds is restricted to refinancing short term debt, it could be positive for liquidity."
One element of the governor's proposal would be to allow municipalities, to issue long term, COFINA-like debt secured by its 1.5% portion of sales tax revenue, Janney said in its report.
"Of course, given recent market activity and rising yields, market access for any PR debt is questionable," Janney said.
"A best case scenario would be market stabilization with year end tax selling behind plus stable fiscal and economic numbers for the second quarter of fiscal-year 2014."
Yields on the Municipal Market Data triple-A scale Monday were as much as a basis point higher on bonds maturing from 2019 to 2022 and from 2027 to 2043. Other bonds remained steady.
Yields on the Municipal Market Advisors benchmark triple-A scale were unchanged across the entirety of the curve Monday.
Treasury yields rose from Friday. The benchmark 10-year yield climbed four basis points to 2.93%, while the 30-year yield gained three basis points to 3.85%. The two-year yield advanced one basis point to 0.40% after gaining six basis points last week.
Yields on Nevada higher education university revenue bonds with a 4% coupon maturing in 2019 rose four basis points to 1.88%, and the yield on University of Connecticut general obligation bonds with a 5% coupon maturing in 2031 climbed two basis points to 4.12%.
Philadelphia Hospitals and Higher Education Facilities revenue bonds with a 5.625% coupon maturing in 2036 slid three basis points to 7.05%, and New Jersey Educational Facilities Authority revenue bonds with a 5.25% coupon maturing in 2029 fell three basis points to 4.07%.
Broward County, Florida, Airport revenue bonds with a 5% coupon maturing in 2037 also firmed by three basis points to 4.87%.
