Low supply, high volatility may lead to price adjustments this week

Muni market participants are ready for yet another week of low volume and high volatility. There is money to be spent; however investors are keeping it on the sidelines until the markets stabilize.

A New York trader said the municipal market was in a bit of a sleepy and quiet holding pattern after last week's back-up in yields, which has made tax-exempts relatively cheaper as a percent of Treasuries. However, he said the market still felt a little "heavy" Monday afternoon.

"We are seeing decidedly different yields on the month," he said. "There was a decent adjustment in yields, but there is still overhang from trades people put on in December. There are still some sellers in the market, but there is no supply to speak of," he continued. "There is a reasonable amount of for-sale supply from trader accounts or dealer desks that have a decent amount of bonds around."

January re-investments fell from previous years, the trader said, adding that money is flowing in, but funds are being patient on spending it. He said the next focal point will be on how retail adjusts to the new levels.

"The one thing that has changed over a month’s time is the perception of where rates are going," he said. "The direction a month ago was not as cheap as it is today. Treasuries continue to drift and that's not helping the tone.”

Another trader spoke of the same holding pattern.

“When we have higher rates, the short end is more attractive and you will bring some of the retail customers back in,” he said. On the other hand, he said the low supply slated for this week’s calendar will be disappointing to investors.

“Customers are uncomfortable without supply,” he said. “But there are opportunities to put your paper to work with top-quality paper this week.”

Two of the top four largest deals carry top-tier ratings.

“With the new levels, there will be a pricing adjustment period so we will have to see what levels deals come in at and where they end at as well,” the trader said.

Prior week's actively traded issues
Revenue bonds comprised 55.66% of new issuance in the week ended Feb. 2, down from 56.23% in the previous week, according to Markit. General obligation bonds made up 38.82% of total issuance, up from 38.26%, while taxable bonds accounted for 5.52%, up from 5.51% a week earlier.

Some of the most actively traded bonds by type in the week ended Feb. 2 were from New York, Georgia and California issuers, according to Markit.

In the GO bond sector, the New York City zeroes of 2038 traded 21 times. In the revenue bond sector, the Main Street Natural Gas Inc. of Ga.’s 4s of 2048 traded 42 times. And in the taxable bond sector, the California 2.193s of 2047 traded 42 times.

Four-week bills announced
The Treasury Department said it will sell $15 billion of four-week discount bills Tuesday. There are currently $75.003 billion of four-week bills outstanding.

Treasury auction
Tender rates for the Treasury Department's latest 91-day and 182-day discount bills were higher, as the three-months incurred a 1.500% high rate, up from 1.425% the prior week, and the six-months incurred a 1.650% high rate, up from 1.625% the week before.

Coupon equivalents were 1.527% and 1.687%, respectively. The price for the 91s was 99.620833 and that for the 182s was 99.165833.

The median bid on the 91s was 1.470%. The low bid was 1.440%.

Tenders at the high rate were allotted 64.64%. The bid-to-cover ratio was 2.78.

The median bid for the 182s was 1.610%. The low bid was 1.580%.

Tenders at the high rate were allotted 0.29%. The bid-to-cover ratio was 2.93.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation. Click here for a brief tour of the Workstation, or contact Vanessa Kim at 212-803-8474 for more information.