Muni yields flattened amid light supply in a lackluster trading session on Friday, making it more difficult for investor to purchase municipal bonds.
Yields on the short-end of the curve were unchanged, while yields on bonds maturing beyond 2042 fell by one basis point, according to the Municipal Market Data's triple-A scale. Market participants said the continuing rally is making it harder to purchase new issuance.
"It's extremely difficult to buy bonds out of accounts, you have to pay really large numbers," a trader in Chicago said. "A lot of accounts have nowhere to go with the cash they have."
Municipal Market Advisors reported that muni yields steadied throughout the curve.
"Left unto itself, we have little doubt that the tax-exempt municipal market can maintain its recent strength, but a primary driver of municipal price action is the U.S. Treasury market, which has performed quite well in recent months," John Dillon, managing director at Morgan Stanley, said in a report released on Thursday.
Issuance for next week is projected to ticks up to about $5.7 million, from $5 billion this week.
The two biggest deals scheduled for next week are refundings, but market participants do not believe refundings will pick up this year.
The Missouri Highways and Transportation Commission is expected to issue the largest deal of the week on Tuesday, a two-part sale that totals $894.5 million of refunding state road bonds. The state of Connecticut is scheduled to bring $650 million general obligation refunding bonds to market in the second biggest deal of the week.
"One of the things that argues against a significant increase in refundings is we've been sitting in a low interest rate environment for quite some time, but it just does not seem to be that there is enough out there to refund in the context of the interest rate environment we're in," Jim Colby, chief municipal strategist at Van Eck Global, said in an interview.
The first part of the Missouri Highways and Transportation Commission deal consists of $582 million first lien bonds and $312.5 million second lien bonds.
Bank of America Merrill Lynch is scheduled to price the deal on Tuesday, after a retail order period on Monday. The deal is not yet rated.
The Connecticut refunding deal will be brought to market by Morgan Stanley and is rated Aa3 by Moody's Investors Service, and AA by Standard & Poor's and AA by Fitch Ratings.
Barclays Capital predicted in a report released on Friday that refunding levels will range between $10 billion to just above $30 billion every month for the rest of 2014, and that they will consistently remain below 2013's levels.
The two largest competitive issuances are scheduled to hit the market on Wednesday. There is a $200 million Fulton County, Ga., transportation deal that is not yet rated, and a $200 million Massachusetts GO sale that also has not received ratings.
Secondary market trading showed mostly strengthening, according to data provider Markit.
Yields on California 5% GOs of 2043 slipped two basis points to 3.66% and California 5%GO refunding bonds of 2023 slid two basis points to 2.38%.
Yields on Florida Hurricane Catastrophe Fund 2.995% revenue bonds of 2020 fell two basis points to 2.77% and the New York City Municipal Water Finance Authority water and sewer system revenue bond 5s of 2034 held at 3.32%.
Treasuries weakened Friday for the first time in three days, with the 10-year benchmark rising two basis points to 2.52% and the two-year note inched up one basis point to 0.38%. The 30-year yields were unchanged from Thursday's market close at 3.34%.
