Prices of top-rated municipal bonds ended weaker on Friday, traders said, after the release of a strong employment report that hinted at a mid-year interest rate hike by the Federal Reserve. Yields finished up by as much as nine basis points on some longer maturities.
Meanwhile, municipal volume continued to surge, with $12.4 billion of new bonds set to be priced in the upcoming week, after a hefty new issue slate came to market in the past week.
Secondary Market
The yield on the 10-year benchmark muni general obligation rose eight basis points to 2.17% from 2.09% on Thursday, while the yield on 30-year GO increased nine basis points to 3.02% from 2.93%, according to the final read of Municipal Market Data's triple-A scale.
"The 5.5% unemployment rate and the larger-than-expected payroll jump of 295,000 make a rate hike decision easier for Fed," MMD Senior Analyst Randy Smolik wrote in a research note. "A cycle of normalizing rates was nearly upon us or at least this was what one would surmise from the dramatic reaction of bonds to the February labor data. A 6.0% unemployment rate was the threshold for the Fed to consider raising rates."
Since the previous Friday, yields on the 10-year have risen by 15 basis points and yields on the 30-year are also up by 15 basis points.
Treasury prices were sharply lower on Friday. The yield on the two-year Treasury note rose to 0.72% from 0.64% on Thursday, while the 10-year yield increased to 2.24% from 2.11% and the 30-year yield was up to 2.83% from 2.72%.
The 10-year muni to Treasury ratio on Friday was calculated at 97.3% versus 99.4% on Thursday, while the 30-year muni to Treasury ratio stood at 106.7% compared with 108.1%.
Primary Market
The market had a busy week as more than $7.5 billion of bonds were sold, topped by California's $1.9 billion of general obligation bonds.
Bank of America Merrill Lynch and Morgan Stanley priced the California GOs for institutions on Wednesday after a one-day retail order period. Traders said the deal, which included the refinancing of more than $1 billion of bonds, was well priced and well received.
"Despite investors' concerns over future interest rates, [the] sale showed a healthy appetite for California paper," said state Treasurer John Chiang. "Recent credit upgrades have increased the market's confidence in the state's credit worthiness and individual and institutional investors alike eagerly got behind California."
The Treasurer's office said the yield on 30-year 5% coupon bonds of 3.27% was the lowest paid by the state since at least 1989. The deal, which saw retail orders of over 30%, is expected to save more than $198 million in debt service costs over the life of the refunded bonds.
Also on Wednesday, Maryland sold two issues totaling $822.7 million in the competitive sector. Bank of America Merrill Lynch won the $518 million GOs with a true interest cost of 2.646%. Citi won the $364.695 million GOs with a TIC of 2.1433%.
Additionally on Wednesday, Wells Fargo priced $344.64 million for Arizona State University and separately priced the University of Virginia's $185.110 million of general revenue pledge refunding bonds and the Indiana University's $141.970 million of consolidated revenue bonds.
On Thursday, Bank of America Merrill Lynch priced the $507.74 million Los Angeles Department of Water and Power, Calif.'s power system revenue bonds. Citigroup Global Markets priced tax-exempt and taxable deals totaling $182.61 million for the New Jersey Housing and Mortgage Finance Agency.
The Week's Most Actively Quoted Issues
New York and New Jersey, Georgia and Puerto Rico names were among the most actively quoted issues in the week ended March 6, according to data released by Markit.
Among bid-side quotes, the Port Authority of New York and New Jersey 5.647s of 2040 were quoted by 10 unique dealers. Among ask-side quotes, the Atlanta water and wastewater revenue 5s of 2040 were quoted by 18 dealers. And among two-sided quotes, the Puerto Rico 8s of 2035 were quoted by 11 dealers, Markit said.
The Week's Most Actively Traded Issues
Among the most actively traded issues in the week ended March 6, were issuers from California, Georgia and Iowa, according to Markit.
In the GO bond sector, California 3s of 2029 were traded 78 times. In the revenue bond sector, the Atlanta water and wastewater 5s of 2040 were traded 99 times. And in the taxable bond sector, the Iowa special obligation 6.75s of 2034 were traded 39 times, according to Markit.
Tax-Exempt Bond Funds See Inflows
Municipal bond funds which report weekly posted $408.481 million of inflows in the week ended March 4, after experiencing inflows of $429.330 million in the week ended Feb. 18, according to the latest Lipper data.
The four-week moving average remained positive at $339.278 million in the latest week after being in the green at $384.441 million in the prior week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Muni bond funds so far have experienced inflows in each week of 2015, according to Lipper data. Inflows for the year total $5.636 billion.
Long-term muni bond funds saw inflows of $200.363 million in the latest week, after experiencing inflows of $308.995 million in the previous week.
High-yield muni funds recorded inflows of $124.114 million in the latest reporting week, after inflows of $120.709 million in the previous week. Exchange-traded funds had inflows of $83.539 million, after recording inflows of $149.114 million in the previous week.
In contrast, long-term municipal bond mutual funds posted $1.03 billion of inflows in the week ended Feb. 25, according to the Investment Company Institute. ICI reported that inflows into long-term funds were $274 million in the previous week.
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar increased $7.025 billion to $16.045 billion on Friday. The total is comprised of $3.213 billion competitive sales and $12.832 billion of negotiated deals.
MSRB Previous Session's Activity
The Municipal Securities Rulemaking Board reported 41,039 trades on Thursday on volume of $12.445 billion. Most active on Thursday, based on the number of trades, was the state of California Series 2015 GO 3s of 2029, which traded 364 times at an average price of 98.059, with an average yield of 3.163%; (initial offering price of 98.094/initial offering yield of yield of 3.17%).
