The tax-exempt market saw mixed trading during the holiday-shortened week and overall ended weaker with yields rising across the curve.
Trading was quiet and steady Tuesday as the market got off to a sleepy start after the three-day weekend. Munis opened weaker Wednesday then posted gains Thursday.
“We gave up ground on Wednesday and recovered some Thursday but I never got the sense that there was strong underlying demand,” said Jim Colby, portfolio manager and senior market strategist who oversees six muni ETFs with $2.1 billion in assets at Market Vectors ETFs. “We got past the fiscal cliff and the January effect was somewhat muted by expectations for a worse outcome. We put in a positive performance for January but it wasn’t striking. And this week was reflective of that same underlying sense and pattern.”
He added the market felt like a long, short week.
“There were a lot of subplots,” Colby said. “You had the price variance on Wednesday in the competitive market, the release date was set for Meredith Whitney’s book on the fate of the states, the potential for resolution of Detroit’s failing finances, inflows into muni bond funds and ETFs, and California announced a big sale to come in a few weeks which will be a very significant data point for everyone going forward.”
Others agreed the week had a mixed read.
“Wednesday trading opened very quiet but picked up as the day progressed and offers were cut,” said Dan Toboja, vice president at Ziegler Capital Markets. “While munis showed weakness against a stronger Treasury market, the early customer bid lists got solid numbers. The large general market deals gave conflicting reads and North Carolina came wider than expected.”
Other market participants said Wednesday was a weaker day in the market.
“Many issues needed upward yield adjustments to be finalized,” wrote Alan Schankel, managing director at Janney Capital Markets. “As March 1 grows near, sequester is on the market’s mind, generating uncertainty about reductions in payments to state and local government as well as the impact of economic slowdown on sales and income taxes.”
In the primary market this week, $4.20 billion in bonds were issued including $1.87 billion on the negotiated calendar and $2.33 billion in the competitive market.
Two of the week’s biggest deals came in the high-grade market. On Wednesday, triple-A rated North Carolina auctioned $700 million of general obligation bonds that traders said were priced very cheap.
On 5% coupon bonds maturing in 2024, yields were 17 basis points higher than the Municipal Market Data yield on the same maturity. Yields were 20 basis points above the MMD yield in 2025 and 23 basis points above the comparable MMD bond maturing in 2026.
On Thursday the municipal market had a much firmer tone and that held true in primary deals. Triple-A rated Delaware auctioned $225 million of GOs that were priced right at or one basis point under the MMD scale on bonds with 5% coupons.
Specifically in the primary, Colby said there is still demand in the market, but there was apathy this week. And while high-grade deals were priced cheap high-yield bonds did very well.
“There is very little issuance in high-yield so demand is overwhelming supply,” he said. BB&T Capital Markets priced $101 million of Illinois Finance Authority revenue bonds for Franciscan Communities, rated BBB-minus by Fitch Ratings. Colby said the term bonds were 10 to 13 times oversubscribed.
“When the bonds were free to trade the bid side pushed them up 20 bps from where they came,” he said. “Demand was significant and aftermarket trading is representative of the demand and how the traders view the real value in this particular offering.”
In the secondary market, Colby said trading was focused on the taxable side. “Secondary focus was more on BABs this week and more on the taxable side than on the tax-exempt side,” he said. “Despite bids wanted here or there, there was very little directional activity. There was some trading but I didn’t see the volume worthy of detailed analysis.”
According to the Municipal Securities Rulemaking Board, there were 40,941 trades on Tuesday, higher than the 30-day average of 39,493 trades. Par amount traded was down significantly from its 30-day average of $11.143 billion, at $7.875 billion.
Activity picked up Wednesday when the market had 41,942 trades compared to its 30-day average of 39,537 trades. Par amount traded was $10.316 billion, just shy of the 30-day average of $11.213 billion.
Thursday was the most active day with 42,228 trades, well above the 30-day average of 39,478 trades. Par amount traded was $13.987 billion, above the 30-day average of $11.304 billion.
Overall for the week, the MMD scale ended weaker. The 10-year yield climbed five basis points throughout the week through Thursday to finish at 1.90%. The 30-year yield closed two basis points higher for the week at 2.94%. The two-year yield ended one basis point lower at 0.31%.
The Municipal Market Advisors scale ended weaker through Thursday. The 10-year yield closed up three basis points for the week at 1.90% while the 30-year yield also finished up three basis points at 3.02%. The two-year was steady for the week at 0.35%.
In contrast, Treasury yields ended lower for the week. The benchmark 10-year yield traded at 1.97% Friday morning, down from 2.01% the previous Friday. The 30-year yield traded at 3.16%, down from the 3.18% the Friday before. The two-year yield also traded lower at 0.26%, down from the 0.28% the week before.
