Traders said municipal bond yields were up just slightly Monday even as the benchmark scale showed broad weakening across the curve.
“It’s difficult to interpret what the market’s doing,” said a trader in Chicago. “I’m not seeing anything move.”
The Municipal Market Data scale has been observed with skepticism recently because a consensus of traders believe it isn’t capturing underlying weak sentiment in the market.
A lack of trading makes it more difficult for the scales to adjust.
The two-year triple-A yield rose two basis points to 0.61%, while the benchmark 10-year yield climbed five basis points to 2.98% and the 30-year yield rose two basis points to 4.70%, according to MMD.
The Chicago trader believes there were not enough trades to justify those moves and suggested a Ouija board may be involved — or simply that MMD is playing catch-up.
“I didn’t see what the scale saw,” added a trader in New York, who described the market as “roughly flat” and said 10-year bond yields moved up two or three basis points at most.
Secondary trading was “very quiet, even for a Monday,” the New York trader said.
In the new-issue market Monday, the New York City Municipal Water Finance Authority priced for retail $400 million of new-money revenue bonds.
The deal is rated AA-plus by Standard & Poor’s and Fitch Ratings and Aa2 by Moody’s Investor’s Service. Yields ranged from 0.53% in June 2012 to 5.14% on bonds maturing in 2043.
The authority said it hoped to place the bonds with retail buyers, without further sale, and reserved the right to accelerate the pricing for institutions, which is set for Tuesday.
Aside from that deal, new supply was minimal. That has kept a cap on yields despite the uptick Monday.
“The only thing that’s kept us going is the light volume,” a New Jersey trader said. “There’s no paper out there.”
The MMD curve was in line with broader trends in financial markets, which saw investors take money out of safe havens in favor of riskier assets.
The S&P 500 and Dow Jones industrial average each rushed out of the gate in early morning trading and finished 1.50% higher, while the 10-year Treasury yield jumped six basis points from Friday’s close to 3.33%.
This trend continues from late last week when investor sentiment shifted into positive and reversed losses due to the fallout from the earthquake in Japan.
“Continued signs of progress in cooling Japan’s nuclear reactors and news that some Japanese factories are resuming production have U.S. equity futures pointing to a strong open and Treasuries on the defensive,” economists at BMO Capital Markets said in a morning research note.
The yield on the two-year Treasury note rose five basis points to 0.64% and the 30-year Treasury yield rose three basis points to 4.45%.
Traders said munis were not following Treasury prices, even if the end result was the same by MMD standards.
The New Jersey trader described munis as “totally disconnected from Treasuries.” He said they are “in their own little world right now, operating completely independently from any other market.”
A lack of supply remains the dominate theme in pricing the muni market, traders said. This week brings $4.4 billion of new issuance — one of the heaviest weeks of the year, albeit well below the $8 billion weekly average of last year, according to Thomson Reuters.
“A lot of people are concerned about the calendar right now,” the New Jersey trader said. “You bring anything into this kind of market and munis will go down, trust me.”
Year-to-date issuance was $39.59 billion on Friday, or less than half of the $85.8 billion issued in the same period last year, Thomson Reuters data shows.
Issuance was expected to be light this quarter owing to the end of the popular Build America Bonds program — but not this light.
George Friedlander, municipal bond strategist at Citi, recently revised his 2011 issuance outlook down to $300 billion. But on Friday he wrote that even that may be too high.
“That, or the muni market will have to handle about $27 billion per month for the last nine months of the year,” Friedlander said.
He called larger issuance “a challenge without significantly higher long-term yields, given the thin and narrow base of demand for tax-exempts.”
Tuesday’s $830 million deal from New York State could give a better idea of what the true price of tax-exempt bonds is these days, a San Francisco trader said. There’s a broad perception that when sizeable supply hits the market, yields will jump.