Trading dropped off significantly in the primary and secondary markets this week as Labor Day and the Jewish holiday Rosh Hashanah kept market participants from taking any big positions in the market.
Traders noted the market was weaker Thursday, though it outperformed Treasuries, as buyers steered clear of any purchases.
The market has entered a period of “muni malaise,” they said, and buyers probably won’t step up until outflows from muni bond funds slow.
“This is the single worst muni market performance,” a Boston trader said. “The supply and demand is unreal right now. It’s very wobbly right now and no one is stepping up — not even the cross over buyers.”
For the week ending Sept. 4 odd lot trades of under 100 bonds, tracked by BondDesk Group, showed investor buy transactions fell to 69,027, from the previous week’s 94,889. Buy trades were the lowest in five weeks as their par value fell to $1.720 billion from $2.410 billion the week before.
Sell trades dropped to their lowest in five weeks, falling to 25,639 from 38,465 the previous week. Par value slid to $687 million from $1.039 billion and was the lowest in five weeks.
Still, the ratio of buy to sell trades ticked up to 2.7 from 2.5 the previous week and was the highest in five weeks. In par value, the buy to sell ratio increased to 2.5 from 2.3 the previous week.
Trading by institutional buyers also declined. Trading of block sizes greater than $1 million was down this week versus last week, according to Interactive Data.
On Tuesday, there were 3,668 block size trades of $1.208 billion in par value, down from the previous Tuesday’s 5,548 trades of $1.912 billion. On Wednesday, there were 5,101 block size trades with a par value of $1.770 billion, down from the previous Wednesday’s 5,441 trades of $2.087 billion.
The Boston trader said he started to buy when the market weakened a few weeks ago. With prices continuing to slide, he is going to wait before buying again. “If I liked prices three weeks ago, I love it now. But the market keeps selling off,” he said. “It feels like you’re never going to hit bottom and it’s taking forever to get there, but you just have to persevere.”
Other traders Thursday echoed that trading was slow. “It’s quiet and there are not enough transactions going around so I can see the market being steady,” a New York trader said.
Puerto Rico continues to cause problems for the muni market and is dragging down high-grade muni bonds along with it. “Puerto Rico continues to lead all states and territories downward,” wrote J.R. Rieger, vice president of fixed income at Standard & Poor’s Dow Jones Indices.
The S&P Municipal Bond Puerto Rico Index is down over 1% already for September and nearly 17% year-to-date. Similarly, the Standard & Poor’s Municipal Bond High Yield Index is down more than 7% for the year. Tobacco bonds have also dragged down performance, returning negative 12.38% for the year as measured by the S&P Municipal Bond Tobacco Index.
At the same time, the S&P National AMT-Free Municipal Bond Index fell 5.86% for the year to date.
Still, traders said while the market continues to slip a few basis points every session, they don’t see widespread fears about credit deterioration. “We are not in a situation where there will be massive credit defaults,” the Boston trader said. “The market may sell off, but it’s more of a complete abandonment of the market by the buy side. There is no money there.”
In the primary market, Allegheny County, Pa. was expected to price about $196 million of new money and refunding general obligations bonds and the deal was put on day-to-day status. A banker close to the deal told The Buyer Buyer on Aug. 23 the deal was a “moving target” because of recent interest-rate volatility.
In the secondary market, trades compiled by data provider Markit showed weakening Thursday.
Yields on Ohio’s Buckeye Tobacco Settlement Financing Authority 5.75s of 2034 rose five basis points to 9.16% and University of Cincinnati 5s of 2023 increased four basis points to 3.69%.
Yields on New York City Transitional Finance Authority 5s of 2038 increased three basis points to 4.91% and Sacramento Municipal Utility District 5s of 2037 rose two basis points to 4.98%.
Yields on Puerto Rico Aqueduct and Sewer Authority 5.25s of 2042 and New Jersey Transportation Trust Fund Authority 5.25s of 2024 rose one basis point each to 8.63% and 4.02%, respectively.
On Thursday, yields on the triple-A Municipal Market Data scale ended as much as three basis points higher. The 10-year and 30-year yields rose two basis points each to 3.04% and 4.51%, respectively. The two-year finished flat at 0.43% for the 36th straight session.
Yields on the Municipal Market Advisors scale also ended as much as three basis points weaker. The 10-year and 30-year yields rose two basis points each to 3.16% and 4.61%, respectively. The two-year closed unchanged at 0.55% for the 15th session.
Treasuries weakened Thursday after posting double-digit losses Wednesday. The benchmark 10-year and 30-year yields rose eight basis points each to 2.98% and 3.88%, respectively. The two-year yield increased six basis points to 0.52%.
While muni yield movements were fairly muted Thursday, munis have underperformed Treasuries over the past few months with yields rising faster than Treasury yields. “In August, munis especially underperformed in the 30-year range, resulting in the cheapest ratio year-to-date of 121%,” wrote Michael Zezas from Morgan Stanley. “Municipal cheapness versus Treasuries has contributed to munis’ continued absolute and relative value versus corporate bonds. This dynamic may offer value to crossover investors, as munis are cheap to corporates historically, especially in higher quality and longer dated bonds.”