Traders and analysts said weakening municipal bond yields on Friday wouldn't prevent the tax-exempt market from jumping on new deals in the coming week.
After months of low supply, the municipal market is set to receive more than $11 billion in new issuance next week, according to data from Ipreo and The Bond Buyer. That includes $3 billion of Puerto Rico general obligation bonds set to price on Tuesday.
"We're pushing up to prepare for next week," one financial advisor on the west coast said in an interview. "We're focused on the large calendar, setting up for the deals."
Small selloffs before a big issuance aren't uncommon, the advisor said, as investors look to free up cash to take on bonds, as well as drive yields up to keep pricing on the new paper favorable to buyers.
Potential volume for next week could reach $11.1 billion, compared with $3.51 billion in total sales this past week.
Municipal bond yields measured by Municipal Market Advisors fell as much as seven basis points on some bonds maturing from 11 to 17 years out, whereas yields on short-term bonds climbed two to four basis points.
Treasury yields spiked overall Friday, with the 30-year jumping five basis points to 3.73% and the 10-year benchmark up by six basis points to 2.80%. Two-year notes gained four basis points to 0.38%.
Municipal bonds weakened Friday morning as an economic report showed labor market improvement, which would allow the Federal Reserve to continue winding down its quantitative easing program and support the eventual raising of interest rates.
Increases in nonfarm payroll and private payroll jobs indicated strength in the U.S. economy. Nonfarm and private payrolls grew by 175,000 and 162,000, respectively, beating the consensus of economists polled by Thomson Reuters.
Economists said an increase in the unemployment rate to 6.7% from 6.6% resulted from more people entering the labor force looking for work. The minor increase doesn't indicate weakening in the economy, they said.
"Clearly the market took this report as a positive for the economy," a fixed-income strategist in St. Louis said in an interview. "It signals the Fed will continue on its tapering path."
The report was especially strong given the inclement weather conditions throughout much of the nation in February, the strategist said.
Signs of a strengthening economy could spur the Fed to consider raising interest rates earlier, market participants said. Fed Chair Janet Yellen has indicated that the rate of tapering is dependent on economic growth.
"The big issue is can the Fed hold out until the second half of 2015, when it's expected to increase interest rates," an economist in New York said in an interview. "We expect that the Fed will start normalizing rates earlier and faster. Now interest rates can rise in early 2015 rather than the second half of 2015."
