Tax-exempt yields firmed Monday by two basis points on the short-end but trading of longer maturities remains stagnant as bid-wanted lists go ignored.
“Dealers aren’t willing to step in at these levels right now, so you’re not going to see a lot of dealers stocking bonds, which is usually a source of liquidity,” a New York trader said.
He described the bid-wanted list as “pretty strong for a Monday,” adding that customers may be taking gains or trying to raise cash for new deals coming up this week. Purchases remain light though as investors expect bond prices to cheapen significantly once volume advances from the current 11-year low.
“You’re not seeing a lot of participants buying,” the trader said. “You have strong demand five years and in, but going out longer you see these offerings and there are no bites. You’re seeing the same offerings from the same customers everyday.”
The Municipal Market Data scale showed the 10-year triple-A yield holding steady at 3% while the 30-year scale remained at 4.78%. The 10-year and 30-year scales have been stable for the last seven and six sessions, respectively, amid light new volume and thin demand. That mixture was described as “gridlock” by analysts at Piper Jaffray.
“Municipal investors remain generally apathetic at current yield levels and skeptical that these levels can be sustained should new issue supply increase from current levels,” they wrote in a research note Monday.
The benchmark 10-year triple-A yielded 89.6% of comparable Treasuries on Monday, versus as much as 104.2% in mid-January.
Citi’s George Friedlander added that the lack of trading continues to mask how weak sentiment is in the market.
“The continuing extremely light new issue calendar creates challenges for price discovery while also leading to concerns regarding potential pressures on longer maturities when volume picks up,” he wrote in a note published Friday.
Stating that new volume is at an 11-year low may even be too generous, according to Chris Holmes and Alex Roever at JPMorgan. They note that relative to the size of the muni bond market, issuance is at its lowest in at least four decades.
“Issuance has never been lower; the market has never been larger,” they summed up in a Friday note. “The apparent strength in municipal bond valuation is a near-term technical aberration driven the absence of [new issuance and short-term rates that are higher than 0.25%].”
There continues to be appetite for short-term paper. The MMD scale improved two basis points Monday to 0.68% — a calendar year low.
“Most of the action, if you want to call it that, is on the short-end,” said a trader in New Jersey. “People want to stay short and they’re being pretty defensive — not because they are worried about municipal bonds so much as general volatility in the government market.”
New supply this week is expected to total $2.5 billion, according to Ipreo LLC and The Bond Buyer, versus the $4.46 billion sold last week and a 2010 weekly average of roughly $8 billion.
The largest deal to price Monday was $10.7 million of refunding bonds for Guadalupe-Blanco River Authority.
The bonds, rated Aa2 by Moody’s Investors Service, offered yields from 0.55% in 2011 to 4.74% in 2030. Raymond James was the lead underwriter.
Among Treasuries, the 10-year note closed the day three basis points firmer at 3.36%. The 2-year yield picked up one basis point to 0.61% and the 30-year yield fell one basis point to 4.53%.
Economists at BMO Capital Markets said the steepening yield curve among Treasuries could be due to insurance companies selling liquid assets to cover claims owing to the Japanese earthquake.
That trend has yet to be seen in MuniLand, according to several traders.
Deals expected to hit the market today or Tuesday include $116.8 million of general obligation bonds issued by Wake County, N.C. The debt is triple-A rated by Standard & Poor’s and Moody’s.
Minneapolis is also slated to offer $105.1 million of GO debt, also rated triple-A by Standard & Poor’s and Moody’s.
