The tax-exempt market handled the year’s largest week of primary issuance fairly well as deals were oversubscribed. With attention on the primary market, secondary activity took a back seat throughout the week.
After trading mostly steady throughout the week, munis ended slightly weaker, outperforming Treasuries.
In the primary market, traders said the market saw ample demand given the uptick in supply. “New-issue activity was very robust in terms of demand,” said Dan Heckman, senior fixed income strategist at US Bank Wealth Management. “We had essentially a doubling of new issuance this week and the market received them extremely well.”
Still, he said there were a few spots of weakness on the curve. “There has been a little bit of a hiccup in rates moving up a tick or two around the six- to seven-year part of the curve. But outside that, the sizeable new issue deals that came this week were four to six times oversubscribed.”
Other traders said the market was strong until the majority of the new deals came. “Overall the market felt full,” said Paul Clark, vice president and portfolio manager at TWP Fixed Income Management, a division of Stifel Nicolaus. “When those deals came, things started to sell off a little but the good pieces were moving at high levels. The primary saw lukewarm reception and we definitely saw balances. It was nothing huge but there were definitely balances on some of those bigger deals.”
In the secondary market, activity was subdued as the majority of the focus went to the primary.“I think I would summarize it by saying activity seemed slightly subdued and it seemed the bid was stronger at the beginning of the week and has trailed off as we enter weekend mode,” said Patrick Smith, CEO of Granite Springs. “Desks are keeping inventory low. If I could characterize it in one word, it would be ‘apathy.’”
According to the Municipal Securities Rulemaking Board, trading activity throughout this holiday-shortened week was below the 30-day average.
On Tuesday, there were 37,640 trades, down from the 30-day average of 40,920 trades. In par amount, $8.708 billion traded hands, down from the 30-day average of $10.953 billion.
On Wednesday, there were 38,973 trades, down from the 30-day average of 40,874 trades. Par amount traded was $10.222 billion, below the 30-day average of $10.957 billion.
Activity Thursday was also subdued. There were 39,976 trades, down from the 30-day average of 40,766 trades. Par amount traded was higher than the 30-day average for the only day this week, coming in at $17.635 billion versus the 30-day average of $11.262 billion.
In retail trades of under 100 bonds — or $100,000 par value — secondary activity was much lower this week than last week, according to data from BondDesk Group.
There were 46,017 buy trades for the week ending Jan. 23 compared to the previous week’s 61,727 buy trades. Sell trades were also down significantly to 26,616 versus the previous week’s 31,482 trades.
The ratio of buy trades to sell trades also fell to 1.7 for the week ending Jan. 23 from 2.0 for the previous week ending Jan. 16.
Dollar volume traded also fell for the third consecutive week. There were $1.275 billion buy trades for the week ending Jan. 23, down from the previous week’s $1.713 billion buy trades. Sell trades fell to $782 million from the previous week’s $927 million.
The ratio of buy trades to sell trades in dollar amount fell to 1.6 from the previous week’s 1.8.
Overall for the week, the Municipal Market Data scale ended lower with yields rising several basis points. The 10-year and 30-year MMD yields rose two basis points each to 1.69% and 2.74%, respectively. The two-year was steady for the week at 0.33%.
The Municipal Market Advisors 5% coupon triple-A scale also ended lower for the week. The 10-year and 30-year yields increased one basis point each to 1.72% and 2.82%, respectively. The two-year was steady for the week at 0.34%.
Treasury yields rose throughout the week, and the selloff was bigger than in the muni bond market. The benchmark 10-year Treasury yield jumped seven basis points throughout the week to 1.92% while the 30-year yield soared eight basis points to 3.11%. The two-year ended steady at 0.27% for the week.
And while munis weakened slightly this week, there will continue to be demand for municipal bonds, market participants say.
“Municipals still outperformed Treasuries because investors backed off the flight to quality trade to Treasuries and muni demand stayed relatively healthy,” said Richard Ciccarone, chief research officer at McDonnell Investment Management.
Still, he cautioned that if interest rates start to rise, muni yields will follow Treasury yields higher. “If there is any consistency to a gradual uptick in Treasury yields, munis will follow that, But for the moment, the market still favored munis this week and had somewhat better outperformance to Treasuries.”
Others agree demand for municipal bonds will continue going forward due to an imbalance of supply and demand. Heckman said more refundings are expected in 2013 which will help keep net new issuance low again this year. “Absolute muni yields have fallen to historic lows so there is still potential of issuers to call existing bonds and refund at much lower attractive rates,” he said. “The amount of money invested in the muni bond market is near an all-time high so you’ve got a supply and demand imbalance that persisted through the second half of last year and into this year as well.”
Higher marginal tax rates should also help support demand for munis going forward. “From an absolute level, yields are still historically low but one of the reasons to look at munis is the highest tax rate is higher and the advantage of buying munis for wealthier investors is greater than it was before,” Ciccarone said.
Heckman agreed. “Demand will remain steady and the value proposition of municipals is extremely attractive if you’re in that high tax bracket.”