Municipal bond yields pushed lower Monday amid moderate trading in the secondary, a sixth day of gains.
The tax-exempt market
"We spent the day catching up to Friday's gains in the Treasury market," the trader said. "The muni market was higher Friday, but almost begrudgingly, about three-to-five basis points for some of the mediocre trading names."
Consistent retail activity helped, he added. Though supply is low, retail investors don't like what they see in equity valuations or their coming tax bills, both of which boosts muni demand. The S&P 500 Index lost almost 1.3 percent Monday.
"Since late last week, munis have seen a significant amount of buying," the trader in California said. "And it stems from the retail corner."
Crossing into the afternoon, traders characterized the market as quietly firm as it awaits the arrival of the bulk of the week's new-issue calendar. Market participants were bidding higher on existing credits in the face of increasingly less tax-exempt paper, a trader in Chicago said.
"Everyone's looking for paper, buying stuff tight," he said. "Even a big supply week wouldn't matter now. It wouldn't cheapen things up. It might keep it subdued. But I don't think a big supply week or two's going to spook [the market] right now."
Though taxable bonds aren't driving municipal yields directly, they're creating a favorable setting for their current rally, Matt Fabian, managing director at Municipal Market Advisors, wrote in a research report.
More specifically, increasingly favorable expectations for the effects of reduced economic stimulus by the Federal Reserve, low inflation, a lighter federal deficit and a weak employment picture are propelling taxable yields. For munis, bond dealers have been able to "dramatically ramp up operations and feed Jan. 1 reinvestment demand — despite lingering unsold balances from last year," he wrote.
"Indeed, inter-dealer transactions as a percentage of all par trading last week notched the second, third, and fifth highest daily readings in the last 2,000 trading days."
Dealers have struggled to find sufficient paper to meet a particularly robust retail bid, he added, which revealed an acceptance among investors of current levels and forecasts for total return.
Supply has been light the past two weeks, as it typically is this time of the year. Last week, only $1.78 billion in new deals reached the market. The prior week saw just $10.8 million in new issues.
Potential long-term volume is expected to pick up this week, totaling an estimated $4.88 billion.
Further help may be on the way. The Bond Buyer's 30-day visible supply for Tuesday shows $7.83 billion planned.
Leading all deals this week, JPMorgan expects to price $775 million New York City Transitional Finance Authority tax secured subordinate bonds. Retail order periods are expected Tuesday and Wednesday, followed by pricing Thursday.
Litigation filed to challenge the financing arrangement for a new Minnesota Vikings football stadium forced the delay of a $468 million Minnesota state general fund appropriation bond, which RBC Capital Markets had expected to price Tuesday after a retail order period Monday.
Minnesota Management and Budget Commissioner Jim Schowalter on Sunday elected to shelve the sale. His decision followed the filing of a petition with the Minnesota Supreme Court on Friday to block the sale.
On the competitive side, the Metropolitan Council in Minnesota is scheduled to auction $194 million of general obligation bonds in four series, also on Tuesday.
Wells Fargo Securities priced $76.9 million of Conroe Independent School District, Texas, unlimited tax school building and refunding bonds in the negotiated market.
The Permanent School Fund Guarantee Program grants the bonds triple-A ratings. The bonds hold underlying ratings of Aa2 by Moody's Investors Service and AA by Standard & Poor's.
Yields range from 0.16% with a 3.00% coupon in 2015 to 3.99% with a 5.00% coupon in 2039.
The secondary market showed strengthening, according to data provider Markit. Yields on Citizens Property Insurance Corporation, Fla., high-risk account senior secured 6s of 2017 plunged 15 basis points to 1.20%.
Yields on Illinois GO 5s of 2035 dropped four basis points to 5.05%. Yields on New Jersey State Turnpike Authority revenue 5s of 2038 and Delaware River Port Authority of Pennsylvania and New Jersey revenue 5s of 2029 each fell two basis points to 4.45% and 3.93%, respectively.
Yields on the Municipal Market Data triple-A scale ended Monday lower beyond the front end of the yield curve. Credits maturing after two years firmed by three basis points.
The 10-year triple-A yield and the 30-year each lost three basis points, to 2.61% and 3.98%, respectively. The two-year yield slipped held at 0.34% for a sixth consecutive session.
The Municipal Market Advisors benchmark triple-A scale saw yields fall Monday by as much as three basis points after 2015. The 10-year triple-A yield fell two basis points to 2.61%. The 30-year plummeted two basis points to 4.18%, while the two-year stayed at 0.33%.
Treasuries fell faster than munis on the day. The 10-year yield dropped five basis points to 2.83%. The 30-year yield fell four basis points to 3.77%, while two-year yield slipped two basis points to 0.37%.
Treasuries outperformed as the equities markets crumpled. The Down Jones Industrial Average fell 1.09%, or 179.11 points, to 16,257.94. The S&P 500 lost 1.26%, or 23.17 points, to 1,819.20.
