Market Close: With No Primary, Secondary Markets Show Mixed Trading

Typical for a holiday-shortened week, the municipal bond market kept a low profile Monday as traders said there was very little trading volume.

“We are just waiting for the first of the month to come with only three and a half days this week,” a Chicago trader said. “We are not expecting much and today is pretty quiet. There are not a lot of bids and it’s just grinding along.”

He added that while it was quiet, the buy side was still in the market. “Demand is still there but most shops are only half staffed.”

He added there weren’t big enough deals expected to price this week to give much direction to the market.

Others agreed the limited supply in the primary market was making it hard to move bonds in any direction.

“There’s no traction,” a second Chicago trader said. “There is not enough volume to make a direction call.”

“Govies are off and there is no calendar,” a New York trader said. “So there is just a bit of retail.”

And activity is expected to remain fairly quiet during the holiday-shortened week. The primary market this week can expect $2.97 billion of bonds, down from last week’s revised $7.16 billion. On the negotiated calendar, $2.51 billion should be issued, down from last week’s revised $5.44 billion. On the competitive side, $457 million should be auctioned, down from last week’s revised $1.72 billion.

In the secondary market, trades compiled by data provider Markit showed a mix of strengthening and weakening.

Yields on New Jersey Tobacco Settlement Financing Corp. 5s of 2041 dropped three basis points to 5.67%. Yields on Washington 5s of 2034 slid two basis points to 2.07% while New York’s Metropolitan Transportation Authority 4s of 2043 fell one basis point to 4.09%.

Other trades were weaker. Yields on Massachusetts 3.25s of 2034 jumped three basis points to 3.50% while Rockwall, Texas, Independent School District 5s of 2041 rose two basis points to 3.27%.

Yields on Denver Airports 5s of 2023 and Harris County, Texas, Cultural Education Facilities Finance Corp. 4s of 2035 rose one basis point each to 2.63% and 4.15%, respectively.

And Puerto Rico bonds have also showed significant underperformance recently. Yields on the Standard & Poor’s Municipal Bond Puerto Rico Index jumped 14 basis points on Friday. Since the end of February, Puerto Rico bond yields have increased 25 basis points while investment grade bond yields have risen only six basis points over the same time period.

“Puerto Rico bonds fell off their 2013 rally wagon and dropped by over 1.4% on Friday as rising concerns about implementing effective strategies to right the local economic situation impact the market,” said J.R. Rieger, vice president of fixed income at S&P Dow Jones Indices. “While secondary trading has been light, the weighted average yield of bonds in the index rose by 14 basis points on Friday.

On Friday, the Puerto Rico index returned negative 1.44% while the S&P National AM-Free Municipal Bond Index returned negative 0.07%. Other high-yield indices have outperformed Puerto Rico. The S&P Municipal Bond Illinois Index returned 0.1% Friday while the S&P Municipal Bond High Yield Index returned 0.03%.

Month to date, the Puerto Rico index has fallen 2.64% while the national index fell only 0.83%. The Illinois index dropped only 0.55% while the national high-yield index returned a positive 0.33%.

Still, Puerto Rico has outperformed year-to-date, returning 0.37% versus the national investment index which returned 0.22%. It has underperformed the Illinois index which returned 0.47% month-to-date and the high-yield index which rose 1.99%.

On Monday, municipal bond scales ended mixed.

Yields on the Municipal Market Data triple-A GO scale ended flat to one basis point weaker. The 10-year yield closed steady at 1.94% for the second session while the 30-year yield closed at 3.10% for the fourth consecutive session. The two-year finished flat at 0.31% for the 25th consecutive session.

Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale ended one basis point stronger to one basis point weaker. The 10-year yield fell one basis point to 1.99% while the 30-year yield increased one basis point to 3.20%.The two-year held at 0.33% for the 20th session.

After a choppy session in the Treasury market, yields ended mostly steady for the day. The benchmark 10-year yield and the 30-year yield closed flat at 1.92% and 3.14%, respectively. The two-year yield fell one basis point to 0.25%.

In similar bond news, William Dudley, president and chief executive officer of the Federal Reserve Bank of New York said in a speech Monday that monetary policy needs to remain very accommodative, despite the possible costs and risks associated, as a restrictive fiscal policy holds back the recovery.

“The Federal Open Market Committee is committed to the dual objectives of maximum sustainable employment in the context of price stability,” he told the Economic Club of New York. “Currently we are falling well short of our employment objective and the restrictive stance of federal fiscal policy is a factor. On inflation, we are also falling short, but by a considerably smaller margin. As a consequence, we need to keep monetary policy very accommodative.”

He continued, “I do not claim that there are no costs or risks associated with our unconventional monetary policy regime. But I see greater cost and risk in moving prematurely to a policy setting that might not prove sufficiently accommodative to ensure a sustainable, strengthening recovery. I remain confident that the benefits of a stronger and earlier economic recovery will trump the costs associated with our unconventional monetary policy measures.”

While economic fundamentals “are improving and monetary policy is gaining additional traction,” it may not translate into stronger growth because of the recent increase in fiscal restraint, Dudley said. He called growth “lackluster and disappointing.”

Because of this, he said he sees slow improvement in the labor markets and “muted” inflation, making it “appropriate for monetary policy to remain very accommodative.”

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