Municipal bond yields continued a two-day slide into Friday. Puerto Rico paper was stable to firmer, even after reports suggested that creditors were discussing a possible restructuring of the commonwealth's debt.
"Puerto Rico trading has been pretty steady this week, considering the degree of volatility over the past six months," Ashton Goodfield, head of municipal bond trading at Deutsche Asset & Wealth Management, said in an interview. "Though some positioned this investor meeting as something imminent that was triggered by a specific event, market participants knew better and it hasn't had a big impact on the market."
Puerto Rico officials said Wednesday that a restructuring was not under consideration. The statement came after the Financial Times reported that creditors of the island's debt were planning on meeting in New York City with restructuring specialists.
Puerto Rico bonds have attracted myriad investors, buoying the value of the commonwealth's paper even as the economy there struggles to get its footing. Buyers are in greater variety than before, Goodfield said, with crossover buyers not needing tax exemption and yield-vultures looking for big price appreciation.
"You can see evidence of the mix of buyers because the lower-coupon bonds and low dollar-price bonds are trading at better lower yields than the higher coupon bonds, regardless of the market discount," Goodfield said. "The bonds are trading differently than muni bonds would with traditional buyers."
Yields on the Municipal Market Data triple-A scale were down as much as three basis points on bonds with maturities beyond 2030. Those in the front and intermediate part of the curve were down by as much as one to two basis points, respectively.
"The tone continues to improve as tax frees outperformed Treasuries, particularly on the long end of the curve," Janney said. "The 30-year benchmark triple-A tax free yield dropped 6 basis points to 3.93%, equal to 104.2% of the 3.77% 30-year Treasury yield."
A lack of new bonds in the primary market helped keep yields down, one trader in New York said.
"It's scarcity of bonds supporting munis at this point," the New York-based trader said in an interview. "There's not a lot of product out there and there's always good business in January. It seems like people are getting frustrated with not finding bonds at the level they're looking for."
Muni sales this week totaled $3.8 billion, according to Thomson Reuters, including $855 million of New York City Transitional Finance Authority bonds and $130.7 million of Cook County, Illinois, refunding general obligations.
Volume had abated by Friday, the trader noted, after yields slid as much as six basis points on Thursday.
"We're off the pace of yesterday, we've been running at least 20% above normal levels for most of the week," the trader said. "Today is looking more normal - I expect that has to do with us going into a long weekend."
Market participants throughout the week noted signs of a stagnant U.S. economy, indicating that the Federal Reserve will not accelerate its tapering program. Some even suggested that a future pause in the program could be possible if the economy remains sluggish.
"Rising rate fears have receded as data, such as last week's employment report, continue to signal only moderate economic strength and minimal inflationary pressure," Janney Capital Markets said in a report Friday. "Another sign of changing investor sentiment is seen in fund flows."
Lipper FMI reported that municipal bond mutual funds reporting flows weekly had $103 million of inflows in the week ended Jan. 15, marking the end of 33 continuous weeks of outflows.
"Last week it sounded like we were turning the corner on that," the trader said. "At some point it had to turn around, it couldn't keep going like that forever."
Treasury yields were mixed Friday, with the two, 10, and 30-year yields down one basis point to 0.39%, 2.83% and 3.76%, respectively.
