Retail investors anxious to shorten their municipal bond maturities appealed to buyers for some end-of-year selling on a day of light activity.
Tax-exempt yields moved little while those of Treasuries outperformed as they fell modestly across the curve.
Investor money still appeared to move to the short end from the intermediate and long-ends, a trader in San Francisco said.
"Things are pretty illiquid now, so if you had to do something at this point in the year, you're at the mercy of whoever's left in the market, second- and third-tier guys," he said. "Today, it was more trust departments selling for cash flows, that kind of stuff."
Those muni participants still in the market Monday saw that the five-year space continued to appear rich compared to Treasuries, after Treasury yields pushed higher last week, he added.
Traders saw more bid-wanteds throughout the day's session, many in the front end of the yield curve, the trader said.
"Retail still wants to be short, but they want to be more in the two-year area than in the five-year area," he said. "So, if you're looking for a bond in 2016 right now, it's nearly impossible to find."
As the trading session crossed midday, retail investors tried to unload some of their more expensive muni paper, but they weren't able to sell enough to move levels.
Odd-lot sell orders surfaced largely in response to how tax-exempt paper outperformed Treasuries last week, a trader in Chicago said.
"It's a lot of retail and [separately managed account]-stuff that's out for the bid right now, a lot of Cal paper, just odd lots," he said. "With the back-up in Treasuries, and with munis outperforming, guys are trying to sell some of their stuff that's rich to Treasuries right now."
New muni bond issuance is expected to be insignificant for the week, as the New Year's holiday should keep market participants away, much as the Christmas holiday did the previous week. Less than $1 million of competitive offerings is scheduled for auction.
On the demand side, muni bond mutual funds last week recorded a 31st straight week of outflows, according to Lipper FMI numbers. Weekly reporting funds recorded outflows of $1.49 billion for the week of Dec. 25, against outflows of $1.71 billion one week earlier.
Traders anticipated a response
"When people start coming in next week, if levels hold at this point munis versus Treasuries, munis should be under some type of weakness pressure at that point," he said. "But on the flip side, there isn't going to be a lot of supply, which could hold things in a little further. It depends on how far Treasury rates stay wider than where they were last week, when things were functioning a little more normally."
Indeed, for the month of December through Monday, muni yields have mostly outperformed those of Treasuries, particularly at the short end of the curve. The two-year muni yield hasn't budged over the entire span, Municipal Market Data numbers show. That compares with 10 basis points that two-year Treasuries have climbed.
The 10-year, triple-A yield has increased 10 basis points, against the 10-year Treasury, which has jumped 18 basis points. Meanwhile, the 30-year muni yield has increased five basis points, compared with the equivalent Treasury yield rise of four basis points.
This has pushed muni ratios to Treasuries into richer territory. The 10-year ratio stands at 93%, around its lowest level in 2013. The two-year, at 85%, likewise, has approximated its low for the year. The 30-year ratio, by comparison, has hovered between 106% and 109% all month.
Matt Fabian, managing director at Municipal Market Advisors, wrote in a research report thatmuni yields may climb alongside investors' broader allocation into U.S. equities in the short term. But he isn't certain that economic growth will be sufficient to drive yields appreciably higher.
"While market consensus appears to favor a flatter taxable curve, we see little reason for front-end tax-exempt strength to relent absent a change in the [Federal Reserve]'s target rate," he wrote.
Trades in the secondary market were mixed on Monday, according to data from Markit. Houston Public Improvement 4s of 2018 declined two basis points to 1.13%.
Tennessee Energy Acquisition Corp. 5s of 2027 and New Jersey general obligation 5.25s each slipped one basis point to 4.89% and 2.57%, respectively. California GO 5s of 2017 and Michigan Financial Authority revenue 5s of 2021 each increased one basis point to 0.77% and 2.95%, respectively.
Yields on the MMD triple-A scale were steady through 21 years Monday. After that, they slipped one basis point.
The triple-A, tax-exempt 10-year closed the day's session steady at 2.77%. The 30-year ticked down one basis point to 4.19%. The two-year yield was unchanged at 0.33% for a 31st straight session.
Yields on the Municipal Market Advisors benchmark triple-A scale on Monday were mostly unchanged across the curve. The 10-year inched up one basis point to 2.79%. The 30-year held steady at 4.41%. The two-year lingered at 0.36%.
Treasury yields strengthened along the yield curve. The benchmark 10-year yield ticked down one basis point to 2.98%.
The 30-year yield fell three basis points to 3.90%. The two-year slipped one basis point to 0.39%.
