The municipal bond market was quiet on Monday, starting the New Year holiday week with bond prices up in thin trading.
Traders said tax-exempt yields were lower by one or two basis points.
HIGHER EDUCATION OUTLOOK
The U.S. higher education sector will continue to face challenges in 2015.
Although there have been some positives in higher education such as endowment earnings, gift giving and an improving economy, higher education is expected to encounter many of the same problems next year.
Both Wells Fargo Securities and Moody's Investors Service have recently released reports stating problems such as slow tuition growth, revenue and enrollment will continue.
"There are signs of emerging stability, including overall strong student demand and balance-sheet strengthening," according to Kimberly Tuby, a vice president and senior credit officer at Moody's. "But because most colleges rely heavily on student charges, net tuition growth matching the pace of industry inflation would be necessary for a stable outlook."
Wells Fargo cites stronger federal influence, pension pressure for public institutions and ongoing scrutiny of tuition as issues that are likely to continue in 2015.
"Though the rate of tuition growth is slowing, the emphasis on tuition continues. Some of this is driven by tuition revenue pressure from declining student enrollment," says Roy Eappen, Associate at Wells Fargo Securities.
The National Student Clearinghouse Research Center notes overall enrollment growth decreased 1.3% from Fall 2013 to Fall 2014, according to the Wells Fargo report. The largest decrease was with two-year public institutions; public institutions as a whole declined 1.5% from Fall 2013.
Among the four-year colleges, a major pressure will be slow growth in tuition revenue, while declining enrollment is driving the negative outlook among community colleges, Moody's says. For the four-year colleges, net tuition revenue growth in 2015 will be the weakest in over a decade. The low revenue growth coupled with mounting expenses will contribute to weaker operating performance, according to the rating agency.
One bright spot however is that four-year not-for-profit enrollment increased 1.6% from Fall 2013. "Some of the trends in enrollment partially reflect a transition to an improving economy," said Eappen.
Eappen also said that attempts to grow tuition revenue are hampered by the continued scrutiny of growing student loan debt. The Treasury Borrowing Advisory Committee looked at the student loan market and noted that student loan balances have increased from $1.0 trillion at year-end 2011 to $1.3 trillion in the second quarter of 2014. Default rates have also gone up.
"With over 85% of student debt backed by the Federal government, there will likely be greater Federal focus on this topic in 2015," said Eappen.
THE WEEK AHEAD
No bond or note deals are scheduled for sale until after the start of the New Year.
SECONDARY MARKET
High-grade municipal bond prices were stronger on Monday. The yield on the benchmark 10-year general obligation dropped two basis points to 2.08% from 2.10% on Friday, while the yield on 30-year GOs also declined two basis points to 2.93% from 2.95%, according to the final read of MMD's triple-A scale.
Treasury prices moved higher, with the two-year note yield falling to 0.71% on Monday from 0.74% on Friday. The 10-year yield decreased to 2.22% from 2.25% while the 30-year dropped to 2.78% from 2.82% on Friday.
The 10-year muni to Treasury ratio was at 93.4% on Monday versus 93.3% on Friday, while the 30-year muni to Treasury ratio was at 104.9% compared to 105.0% on Friday.
LIPPER REPORTS MUNI INFLOWS
Weekly reporting municipal bond funds posted $659.448 million of inflows the week ended Dec. 24, following a $611.055 million inflow the previous week, according to Lipper FMI.
