The tax-exempt market was slightly weaker Monday as munis followed Treasuries lower. The lack of new supply kept activity muted as traders waited for new issuance to provide direction.
“We were off about 3 to 4 basis points earlier in the day, and we came back to the stage where we are only off 2,” said a trader in New York. “We started to explore where new issues are going to be coming from but I don’t think anything will change until we see first how that develops.”
He added that overall “I thought munis performed very well, and we did come back a little bit” off the session lows.
“It’s very difficult to start the engines up,” said a trader in New Jersey. “It’s kind of slow and not much activity. I’d say we’re off 3 or 4 basis points on the long end.” He added that traders are “just a little cautious” as the market is off a few basis points overall.
A second trader in New York said munis are “dead” as the stock markets “are taking the center stage.”
The primary calendar is fairly heavy this week, and traders said people are gearing up for issuance on Tuesday and Wednesday. “People try to squeeze it in before the end of the year,” the New Jersey trader said.
Indeed, municipal analysts predict the next few weeks of December will be busy in Muni Land, both from new issuance and from reinvestment money.
“Although we may see another volume push in early December, the final month of the year is unlikely to replicate last year’s frenzy when issuers rushed deals to market to beat the [Build America Bonds] sunset,” wrote Alan Schankel, managing director at Janney Capital Markets.
“Funds available from maturing issues will rise in December to about $22 billion, well above the $14 billion average of the autumn months, providing some technical underpinning for December supply demand dynamics,” he added.
Munis weakened Monday, according to the Municipal Market Data scale. The two-year was unchanged while the three-year yield rose 1 basis point. The four- to seven-year yields increased 2 basis points, and the eight- to 10-year yields moved up 1 basis point. Yields on 11- to 13-year maturities jumped up 2 basis points, followed by a spike of 3 basis points in 14- to 16-year maturities. Yields outside the 17-year maturity jumped 4 basis points.
The two-year muni closed at 0.42% for its 18th consecutive trading session. The 10-year yield finished up 1 basis point to 2.22% and the 30-year yield closed up 4 basis points to 3.79%.
Treasuries closed weaker on Monday, although they closed higher than where they traded Monday morning. The benchmark 10-year yield finished up 2 basis points to 1.97%, but was off the session low when it yielded 2.05% Monday morning.
The 30-year yield closed up 2 basis points to 2.93%, but finished firmer than its morning session low when it yielded 3.01%. The two-year yield closed flat at 0.27%.
In the primary market, around $5.89 billion of muni bonds should hit the market this week, up from a revised $1.29 billion last week. About $5.4 billion of negotiated deals are expected along with $489.1 million of competitive bids.
On Tuesday, Goldman, Sachs & Co. is expected to price for retail $500 million Connecticut special tax obligation bonds, rated Aa3 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
Ramirez & Co. is expected to price for retail $483.9 million of New York’s Metropolitan Transportation Authority revenue bonds. The bonds are rated A2 by Moody’s and A by Standard & Poor’s and Fitch.
In Monday’s secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening.
A dealer sold to a customer Los Angeles Unified School District 5.75s of 2034 at 5.90%, 9 basis points higher than where they traded before Thanksgiving.
A dealer bought from a customer Missouri Environmental Improvement and Energy Resources Authority 5s of 2022 at 2.40%, 6 basis points higher than where they traded last week.
A dealer bought from a customer New Jersey Transportation Trust Fund Authority 5s of 2042 at 4.97%, 9 basis points higher than where they traded before Thanksgiving.
Ratios fell, with the five-year muni-to-Treasury ratio falling to 121.5% on Friday from the high of last week at 129.5%.
The 10-year muni-to-Treasury ratio fell to 112.8% on Friday, down from its high last Tuesday at 118.2%. The 30-year ratio fell to 128.9% at the end of the week, down from 133%.
In other news, Pennsylvania State University bonds are weaker since the sexual abuse scandal stole headlines in early November. And while most CUSIPS of the university bonds are trading lower, they are extremely illiquid, with most trading in smaller blocks between $10,000 and $40,000.
In mid-November, Moody’s put the Aa1-rated bonds on review for downgrade as it assesses the reputational damage that Penn State is sustaining.
Rating analysts noted that potential credit risks include the cost of litigation and potential settlements, loss of federal or state funding, weakened student demand, diminished philanthropic support, and significant management turnover.
Since then, the university bonds are trading lower, though in smaller blocks.
A dealer bought from a customer Pennsylvania State University 5s of 2021 at 2.51% in mid-November, 14 basis points higher than where they traded in September.
A dealer sold to a customer Pennsylvania State University 5s of 2022 at 2.88% in mid-November, 19 basis points higher than where they traded a month earlier. Bonds from an interdealer trade of Pennsylvania State University 5s of 2022 yielded 2.91%, 33 basis points higher than where they traded a month earlier.
