Between Detroit’s bankruptcy, substantial outflows, a heavy calendar of new issues, testimony by Ben Bernanke and a slew of economic indicators, the municipal market had a wealth of drivers vying for influence on yields in the past week.
The net effect was a steepening of the yield curve, with strength on the short end and weakness beyond 15 years in maturity. In the end, it mostly boiled down to technicals, said Adam Buchanan, vice president of municipal credit at Ziegler Capital Markets.
“Outflows, supply and Detroit drove the market this week,” he said. “You’re seeing the long end getting hit pretty hard. To start the week, the yield curve was just about as steep as it’s been in 2013. It looks like it’ll be even steeper than the high in June.”
Detroit’s announcement Thursday afternoon that it was filing for Chapter 9 bankruptcy, the largest such municipal filing in history, overshadowed everything else.
Market watchers and participants initially said the city’s decision surprised no one, and that it had mostly been priced into the market. Yet by midday Friday, muni yields had weakened past the front of the curve, and those beyond 21 years were rising an estimated nine to 11 basis points, according to one market gauge.
Over the week through Thursday, tax-exempt yields fell across the short and intermediate parts of the curve, municipal Market Data showed. The 10-year triple-A yield dropped three basis points to 2.63%.
The two-year fell two basis points to 0.43%. The 30-year yield rose three basis points to 4.03%.
By the week’s end, the performance of Treasuries largely mirrored that of their muni cousins. The benchmark 10-year slipped a basis point to 2.54%. The two-year fell two basis points to 0.31%. The 30-year ended the week two basis points higher.
Muni ratios to Treasuries mostly hovered in place on the week through Thursday, remaining in cheap territory. The 10-year stands at roughly 104%. The two-year rose slightly to about 139%; the 30-year held at 111%.
Issuers lowered yields on deals that arrived through midweek. By Thursday, as tax-exempt yields in the marketplace started to fade, new issues were priced with moderate concessions, but were still absorbed.
Goldman Sachs priced the year’s biggest deal, $2.92 billion of Grand Parkway Transportation Corp., Texas, bonds one day early. Yields on the deal were lowered as much as five basis points in repricing.
There were several important economic indicators this week, including government reports on retail sales, industrial production, the Consumer Price Index, housing starts and jobless claims.
In addition, Federal Chairman Ben Bernanke’s testified on Capitol Hill Wednesday.
But his testimony didn’t appear to have the negative effect on the marketplace that his comments last month did, when they prompted a large sell-off. Technicals remained strong and deals were well-received on the day.
The daily number of trades on the week, climbing to north of 50,000 in aggregate by about mid-week, was similar to heavy levels in June, according to Interactive Data. That includes 50,776 trades on Tuesday and 52,527 on Wednesday.
By Thursday, Lipper FMI’s weekly report confirmed that investor demand continues to suffer. The market has moved into the heart of the June-July-August coupon months, and yet it’s still recording substantial outflows.
For July 17 reporting period, $1.56 billion left muni bond mutual funds that state flows weekly. The worst of those flows concentrated in long-term muni bond funds, which experienced outflows of $1.03 billion.