After almost a month of rallying, municipal bonds continued to soften Tuesday as investors looked toward a Federal Open Market Committee meeting Wednesday in which the Fed may announce updates to its bond-tapering program.
While municipal market participants are mixed on whether the Fed will change its plan to slow its asset-purchasing program by $10 billion each month, traders did agree that bond yields may have hit a bottom after another strong week that ended Friday.
"The market feels like the dealers want to move some bonds," one New York-based asset manager said in an interview. "One gets the impression that the short-term top has appeared and there are some concessions that sellers are willing to give. We're going to see if that's the case when the deals come this week."
The Fed's ability to change its tapering policy, as well as the lack of new big deals to test market demand, are contributing a large degree of uncertainty this week, traders and managers noted.
"Towards the end of last year, retail investors and wealth advisors were thinking 2014 is going to be a really difficult year," one portfolio manager said in an interview. "But then you get months like this January that confound the conventional wisdom of the market."
The strongest start to a year since 2009 has driven bond yields down by as much as 30 basis points on some parts of the curve, and now sellers are considering making concessions to reluctant buyers, according to market participants.
"It seems like yields ran down a little bit too quickly," a trader in New York said in an interview. "Unless something else comes out that points to further weakness in the economic data, then we'll back off a few basis points the next couple of days."
Yields on bonds maturing from 2020 to 2044 were up as much as three basis points Tuesday, according to Municipal Market Data's triple-A scale read. Bonds maturing from 2017 to 2019 were up two basis points, while those with maturities before 2016 were unchanged.
According to Municipal Market Advisors, yields on 5% high-grade bonds rose as much as three basis points 25 to 27 years out on the curve. Bonds with short-term maturities were stable to a few basis points higher.
Market observers have attributed January's rally to a lack of new-issue bonds, which has pressured buyers to compete over a limited number of bonds.
"In reality I just can't remember the last new-issue deal that struggled, even going back to [the end of] last year when the market didn't even feel that well," the asset manager said. "Anytime a deal shows up cheap everyone pounces on it and it goes down."
Barring unforeseen policy changes at Wednesday's Federal Reserve Open Market Committee meeting, yields may return to firming over the next week as issuance remains low, muni participants said.
"Next week's calendar isn't all that daunting; issuance may pick up a little bit," the trader said. "You'd think with some of these weaker economic numbers the Fed may slow down its plan to end quantitative easing a little bit."
Volume this week could reach $4.89 billion, according to Bond Buyer and Ipreo data. Total bond sales last week came to $4.57 billion, according to Reuters.
"January so far has been shaping up to be a month that is reasonably strong, and one that I would imagine retail investors and others did not imagine back in November and December," the portfolio manager saidw. "This may be the kind of year that you get these surprising months and quarters."
In the negotiated market, RBC Capital Markets priced $467.9 million of Minnesota general fund bonds Tuesday. The funds will be used for the state's Minnesota Vikings football stadium.
Yields on the bonds ranged from 0.20% with a 2% coupon maturing in 2015 to 4.12% with a 5% coupon maturing in 2043. The bonds, rated AA by Standard & Poor's and Fitch Ratings, are callable at par in 2023. In the competitive arena, Citigroup Global Markets Inc. won the bid for $237.1 million Wisconsin general obligation bonds, while Bank of America Merrill Lynch won $202.1 million of Tarrant County, Texas, water district revenue bonds.
Yields on the Citi-led Wisconsin bonds ranged from 0.20% with a 3% coupon maturing in 2015, to 3.65% with a 5% coupon in 2034. The bonds are rated Aa2 by Moody's Investors Service and AA by S&P and Fitch. They are callable at par in 2022.
Yields on the Bank of America-led Tarrant County bonds had yields ranging from 0.29% with a 6% coupon in 2015 to 4.28% with a 4.25% coupon maturing in 2044. The bonds, rated Aa1 by Moody's and AAA by S&P, are callable at par in 2024.
Secondary market trades compiled by Markit showed weakening Tuesday.
Ohio Tobacco Settlement asset-backed senior bonds with a 5.75% coupon maturing in 2034 gained eight basis points to 8.08%, while Massachusetts general obligation consolidated loan bonds with a 5% coupon maturing in 2033 added three basis points to 3.60%.
New York City Transitional Finance Authority future tax-secured subordinate bonds with a 5% coupon maturing in 2038 ticked up one basis point to 4.09%.
Treasuries fluctuated and ended Tuesday firmer, with the 10-year and 30-year yield down one basis point to 3.67% and 2.75%, respectively. The two-year remained steady at 0.36%. The firming marks a departure from Monday, when munis fared better than Treasuries.
"The municipal market was weaker on Monday, although it still managed to outperform Treasuries," Janney Capital Markets reported Tuesday. "Volume was light with about $5.5 billion trading according to MSRB data."
