The tax-exempt market cheapened the week ended March 15 as underwriters priced deals with concessions.
Traders in the market say broker dealer inventories are also building under the weight of heavy new issuance and an equity rally that has pushed stocks to record highs.
“This backup in yields is healthy and needed,” said Dan Heckman, senior fixed income strategist at US Bank Wealth Management. “We do think there is still some buying power out there but the market is going to have to adjust to a fair value. Two weeks ago the market was very rich and overpriced. We think the correction is not out of hand and somewhat normal.”
The market struggled from the start of the week. “We came into the week on a soft spot to begin with as cash was coming out of bond funds,” Heckman said. “Equities are getting new highs and it’s attracting investors. There was more positive economic numbers coming out this week and it’s just not as muni bond friendly at the present time. Consequently we are going to end the week on a weak note.”
In the primary market, the $2.15 billion of tax-exempt California various purpose general obligation bonds took the focus for the week. The retail order periods were well received with $795.4 million bought up by retail. That totaled to 89.4% of the $888.9 million of bonds offered to retail and 37% of the entire deal.
Institutional buyers faced headwinds. Yields were increased as much as 15 basis points in institutional pricing.
“There was a lot of supply and California dominated the new issue calendar,” Heckman said. “They had to raise rates to increase investor demand.”
In other deals, Wells Fargo had to increase yields on the $625 million of Empire State Development Corp. by six to nine basis points. Ramirez & Co. was able to lower yields as much as three basis points on the $500 million of New York City Municipal Water Finance Authority bonds.
In the secondary market, broker dealer inventories are building. “To us, that’s an indication that overall demand has waned,” Heckman said. “When inventories build there is less of a strong bid when sellers come into the market.”
Larger inventories also don’t bode well for new pricings. “Underwriters are very sensitive and want to move new issue deals and keep up with current market environment and pricing levels,” Heckman added. “They don’t want to overprice an issue and have it stuck with excess inventory. Inventories are getting larger and they are going to be careful about how aggressive they bid on bonds coming up for sale.”
With yields rising, activity climbed as the week progressed, according to the Municipal Securities Rulemaking Board.
On Monday, there were 36,788 trades, down from the 30-day average of 39,882 trades. Par value traded was $6.272 billion, down from the 30-day average of $10.599 billion.
By Tuesday there were 42,533 trades, up from the 30-day average of 40,074 trades. Par value traded was $9.775 billion, down just slightly from the 30-day average of $10.668 billion.
On Wednesday there were 41,819 trades, above the 30-day average of 40,113 trades. Par value traded peaked at $12.950 billion, significantly higher than the 30-day average of $10.686 billion.
On Thursday there were 41,818 trades, above the 30-day average of 40,122 trades. Par amount traded was $13.313 billion, up significantly from the 30-day average of $10.702 billion.
Overall for the week, municipal bond market scales ended lower with yields rising across the curve.
Yields on the 10-year Municipal Market Data triple-A GO scale climbed one basis point for the week through Thursday to 2.00%. The 30-year yield jumped six basis points to 3.14% through Thursday. The two-year finished flat at 0.31% for the week.
Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale climbed much more, with the 10-year yield finishing up four basis points to 2.03% through Thursday. The 30-year yield jumped seven basis points to 3.22% for the week. The two-year held at 0.33% for the week.
Treasuries ended stronger overall for the week. Through Friday afternoon, the benchmark 10-year yield fell five basis points to 2.01% while the 30-year yield dropped three basis points to 3.23%. The two-year yield fell one basis point to 0.26%.
And with yields now climbing for several weeks in a row, many market participants think this could be a buying opportunity. “We have been hesitant buyers over the last few weeks, but with some adjustments now we are starting to get more interested. I do believe that with a couple more weeks of heavy supply and if the market moves down sufficiently, this does create a short-term buying opportunity for the market.”
