The tax-exempt market struggled to gain momentum all week as a limited primary calendar and uncertainty over the direction of interest rates in the secondary market kept buyers at bay.
“It was a fairly flat week and spreads were stable and didn’t move much,” said Tom DeMarco, fixed income strategist at Fidelity Capital Markets. ”We only had about $5 billion on the calendar this week for tax exempts so it wasn’t a big calendar.”
In the primary specifically, DeMarco said underwriters are willing to pay more for competitive deals, a trend that started weeks ago.
“In general we saw competitive deals price on average 15 basis points tighter than negotiated deals,” he said. He added this week’s Wisconsin deal also came aggressively.
JPMorgan won the bid for $410.3 million of Wisconsin general obligation bonds, rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings. The deal was sold at a true interest cost of 2.86%. Yields ranged from 0.195% with a 2% coupon in 2014 to 3.06% with a 4% coupon in 2033. The bonds are callable at par in 2022.
While competitive deals have been priced aggressively in recent weeks, it does not always mean bonds are digested completely. “While there are pretty aggressive bids on competitive deals, there are still balances kicking around especially if you go out longer on the curve,” he said. “Given strong Treasuries, there is no urgency to sell as long as we don’t have a selloff.”
In the secondary market, trading activity was lackluster. “There is very thin trading and it just has to do with where rates are right now,” DeMarco said. “It’s hard to get retail excited at these levels.”
Other traders agreed. “The overall themes remained the same,” said Dan Toboja, vice president at Ziegler Capital Markets. “Bid-wanted lists were relatively large but the trading off the lists was sporadic. What was interesting to note was how dramatically trading in the new issues slowed.”
He added there was only a small amount of trades in the secondary the day after those new deals priced. “Whether that was due to the focus switching to next week’s deals or customers and dealers refusing to chase deals remains to be seen.”
On Monday, there were 37,050 trades, down the from 30-day average of 39,862 trades, according to the Municipal Securities Rulemaking Board. Par value traded came in well below the $12.011 billion 30-day average at $7.879 billion.
On Tuesday, there were 42,812 trades, up from the 30-day average of 40,063 trades. Par value came in at $12.035 billion, slightly below the 30-day average of $12.203 billion.
By Wednesday, activity picked up significantly. There were 40,756 trades, up from the 30-day average of 40,004 trades. Par value traded was $15.879 billion, up significantly from the 30-day average of $12.406 billion.
By Thursday, activity cooled again. There were 39,574 trades, down from the 30-day average of 39,929 trades. Par value traded was $12.668 billion, just above the 30-day average of $12.397 billion.
Through Thursday, yields on the 10-year Municipal Market Data triple-A GO scale were flat at 1.70% and the 30-year yield was also steady at 2.89%. The two-year was steady for the week at 0.29%.
Yields on the 10-year and 30-year Municipal Market Advisors 5% coupon triple-A benchmark scale were steady for the week at 1.77% and 3.02%, respectively. The two-year was also flat at 0.32%.
For the week, Treasury yields were lower. The benchmark 10-year yield fell four basis points during the week to 1.67% as of Friday afternoon. The 30-year yield slid two basis points to 2.86%. The two-year was steady for the week at 0.23%.
Going forward, one concern for the market recently has been outflows and funds that report weekly have seen eight consecutive weeks of withdrawals, according to Lipper. “Outflows are minimal so I’m wondering if we are about to flip positive over the next few weeks,” DeMarco said, citing EPFR data. “And we are seeing more outflows in money markets than in short- or intermediate-term funds.”
The municipal market is also entering a historically positive time as demand typically outweighs supply in the summer months. “Unless we see a selloff in Treasuries, we should come up to that period in June and July with positive technicals, DeMarco said.” According to MuniView, June 1 is expected to see $56.4 billion of current and advanced refunding money as well as bonds and notes maturing.
