Dealers hot to unload heavy inventory made concessions Monday, lending the municipal market a weaker tone and pushing yields higher.
The market continued its difficult stretch that started last week. Dealers had to drop prices to get hits, but they were getting hits, a trader in New York said.
“It seems like, if you have a bid, you’re getting hit,” he said. “You’re seeing dealers willing to lighten up on their inventory and come off levels a good amount to get stuff off their books. It’s overhang from the last couple of weeks.”
Market conditions discouraged issuers of the week’s largest deal, by the Metropolitan Transportation Authority’s Triborough Bridge and Tunnel Authority, causing it to delay holding a retail order period.
Tax-exempt yields rose more than did Treasuries early in the session while traders looked to unload inventory or replace losses. Mostly, the market felt unsettled, a trader in Chicago said.
“It’s bleak,” he said. “We need to get through some of these balances that have been left around. The uncertainty that surrounds the market had got people a little bit gun-shy. So, we’re off probably more than we should be.”
Volume this week should see a predictable “holiday-level” drop. A total of $2.39 billion is expected this week, compared with $10.6 billion last week.
This breaks down into $2.08 billion of municipal bond sales scheduled for negotiated sale this week, versus a revised $8.41 billion that were sold last week. Bonds scheduled for competitive sale this week total $309.1 million, compared with $2.18 billion last week.
Frost Bank priced $120.1 million of Bexar County, Texas, tax-exempt venue project revenue refunding bonds in two series. The bonds are rated A1 by Moody’s A by Standard & Poor’s and A-plus by Fitch Ratings.
Yields in both the larger $94.2 million series and the smaller $25.9 series range from 0.95% with a 2% coupon to 4.12% with a 5% coupon in 2049. The bonds are callable at par in 2022. Yields rose as much as eight basis points past the front end of the curve in repricing.
On Monday, the MTA’s Triborough Bridge and Tunnel Authority announced it would delay pricing on what is expected to be the week’s largest deal — between $550 million to $850 million of senior and subordinate revenue bonds.
Jefferies & Co. was expected to hold a retail order period for the deal Monday with pricing expected Tuesday. Market conditions should determine the size of the deal and the pricing date.
The bonds originally were scheduled to price last week but were held over on account of volatile market conditions, the authority said at the time. The credits should arrive structured as serials, term bonds and capital appreciation bonds with a maximum maturity of 2032.
“We continue to monitor market conditions and have the deal on a 'day-to-day’ basis through Wednesday,” said Kevin Ortiz, a spokesperson for the authority. “If we don’t see an improvement in market conditions by Wednesday, we will postpone the transaction until 2013.”
Liquidity in the municipal market hit a wall last week, Peter DeGroot, a muni strategist at JPMorgan, wrote in a research report. The heavier calendar, rising tax risk, the general low yields, and the downgrade of Puerto Rico and related credits all colored the market’s mood. And each factor had a proportionate impact, he wrote.
“Supply and tax risk certainly appear to have been the early catalyst for the selloff, but the near record low rate environment made the market particularly vulnerable,” DeGroot wrote. “Clearly, however, there were more factors in play than simply higher supply as cumulative bid-wanteds for the week were $991 million, or the highest since January 2011. This level of bid-wanteds has been seen in only three periods since December 2007.”
Inflows, an indicator of investor demand, remain positive throughout the uncertainty in the market. Muni bond funds in November saw inflows to the tune of $5.2 billion, according to Morningstar Direct Asset Flows Update.
For the year to date through Nov. 30, they’ve recorded $53.1 billion of inflows, Morningstar numbers show. That compares with -$12.5 billion for 2011.
Muni bond funds joined taxable bond funds with strong inflows. Taxable bonds also reported inflows, at $17.9 billion for November and $241.9 billion for the year to date.
By comparison, U.S. equity funds struggled with -$14.1 billion in outflows for November and -$99.6 billion for the year to date.
Tax exempt yields Monday continued on their upward trajectory. Between five and eight years they rose from three to seven basis points, according to one market estimate. Beyond eight years on the curve, they are up to eight basis points higher.
The benchmark 10-year yield jumped eight basis points to 1.74%, Municipal Market Data numbers showed.
The 30-year yield also jumped eight basis points to 2.79%. The two-year finished steady at 0.30% for the 56th consecutive trading session.
Muni yields in the intermediate and long ends of the curve have given investors a ride since November. The 10-year and 30-year yields dropped from 1.73% and 2.82%, respectively, on Nov. 2. By Nov. 30, they had plunged to record levels of 1.47% and 2.47%, respectively. By Monday’s close, though, they’ve roughly come full-circle — a journey of roughly 26 basis points down and up at the 10-year and around 34 basis points down and up for the 30-year.
Treasury yields also increased. They started Monday rising at a slower pace than those of munis but picked up steam as the day progressed.
The benchmark 10-year yield jumped seven basis points to 1.78%. The 30-year yield also vaulted seven basis points to 2.94%. The two-year yield ticked up two basis points to 0.26%.