The municipal bond market was deathly quiet on Friday after the Christmas holiday with no new issuance scheduled until 2015. Traders predicted only minimal activity on Friday and they were not disappointed.
Prices of high-quality municipal bonds were unchanged, according to Municipal Market Data.
January Effect
The New Year may get off to a good start for the muni market with the "January Effect" and muni-to-Treasury ratios becoming a decisive factor in performance.
The January Effect happens when investors have reinvestment money and are looking to buy muni bonds at a time when dealer inventories are depleted because of lowered issuance over the holidays.
"Muni ratios hold enough attractiveness to suggest the January Effect will provide a good start for the year," says Randy Smolik, senior market analyst at MMD. "Treasury yields also hold considerable attractiveness to world rates, while the ECB may drive their rates lower through sovereign debt purchases."
Smolik said the January Effect can be more pronounced if primary issuance is slow to gear up, as was the case at the start of this year.
And lack of volume is not the only impetus propelling the market.
"Besides the demand/supply nature of January, muni ratios offer some attractiveness. Since June, the ratio of 10-year MMD/Treasury ranged from 84.7% to 95.8%. Its average was 89.7%. The ratio was 92.9% on Wednesday," he said. "The ratio for 30-year MMD/Treasury ranged from 94.6% to 106.4%. The average was 99.1% and it was last at 104.6%."
Additionally, U.S. Treasury yields are looking good compared to those in the rest of the world. And while the Federal Reserve is forecast to raise rates in 2015, the question of whether it will be later rather than sooner remains a key question.
"So, one could surmise that all indicators point to a favorable start for munis in 2015," Smolik concluded.
Secondary Market
High-grade municipal bond prices were unchanged on Friday. The yield on the benchmark 10-year general obligation was flat at 2.10%, while the yield on 30-year GOs was steady at 2.95%, according to the final read of Municipal Market Data's triple-A scale.
Treasury prices were mostly higher, with the two-year note yield flat at 0.74% on Friday from 0.74% on Wednesday. The 10-year yield decreased to 2.25% from 2.27% while the 30-year dropped to 2.82% from 2.85% on Wednesday.
MSRB Reports Previous Session's Activity
The Municipal Securities Rulemaking Board reported 11,031 trades on Wednesday on volume of $2.510 billion.
Most active on Wednesday, based on the number of trades, were the Bolingbrook, Ill., refunding bonds of 12/29/14 Series A 4s of 2038, which traded 84 times with an average price of 100.3 and an average yield of 3.953%. Second most active were the New Jersey Transportation Trust Fund Authority transportation program bonds, Series AA 4 1/4s of 2044, which traded 44 times with an average price of 99.604 and an average yield of 4.265%.
The Week Ahead
No bond or note deals are scheduled for sale until after the start of the New Year, with both the negotiated and competitive calendars devoid of any issues until January.
Money Market Funds
Tax-exempt money market funds increased $2.73 billion, bringing total net assets to $259.58 billion in the week ended Dec. 23, according to The Money Fund Report, a service of iMoneyNet.com. The new inflows are up from the $2.14 billion inflow in the prior week.
The average seven-day yield for the 396 weekly reporting tax-exempt money funds held steady at 0.1%, while the average maturity decreased by one day to 39 days compared to the previous week.
The 994 weekly reporting taxable money market funds, meanwhile, reported inflows of $22.92 billion, reversing the trends of $1.76 billion in outflows for the prior week. The average, seven-day yield for the taxable money funds remained unchanged at 0.01%, while the average maturity declined one day to 45 days.
Overall, the combined total net assets of the 1,390 weekly reporting money funds grew $25.65 billion in the week ended Dec. 23 to $2.742 trillion - marking the 10th straight week of reported inflows, according to The Money Fund Report.
Meanwhile, The Investment Company Institute reported tax-exempt money market fund assets rose to $260.77 billion in the week ended Dec. 22, up from $259.93 billion in the prior week. Tax-exempt assets held by institutions slipped to $71.25 billion from $71.47 billion in the prior week, ICI reported, while retail assets rose to $189.52 billion from $188.45 billion in the previous week.
Total money market fund assets increased to $2.71 trillion in the week ended Dec. 22 from $2.69 trillion in the prior week, ICI reported.
Muni Bond Indexes Mostly Unchanged
The weekly average yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, gained three basis points in the week ended Dec. 24, rising to 4.31% from the 4.28% the previous week.
The Bond Buyer's 20-Bond GO Index of 20-year general obligation yields went unchanged from the previous week at 3.65%. The last time the index was lower was on May 16, 2013 when it stood at 3.61%.
The 11-Bond GO Index of higher-grade 20-year GO yields was also unchanged from the previous week at 3.50%. It is at its lowest level in over a year, when it stood at 3.46% on May 23, 2013.
The Bond Buyer's Revenue Bond Index stayed put from the previous week at 4.43%. The last time it was at this number was Sept. 6, 2012.
Aaron Weitzman contributed to this report.
