California bonds moved against the trend Monday and advanced amid lighter and weaker trading in the tax-exempt market.
Market participants said California tax-exempt spreads tightened against the triple-A benchmark scale on Friday and continued to do so Monday, even ahead of one of the largest deals of the week, $635 million Regents of the University of California Medical Center pooled revenue bonds.
“There is yield attraction in California,” a Los Angeles trader said. “There was a small window when California general obligations 5% coupons traded at par. Now they are through that. But it’s at 4.80% instead of 3.80%. So absolute yield levels are pulling people back in.”
The California five-year GO spread to the triple-A Municipal Market Data scale fell to 18 basis points from 21 basis points a week earlier. The spread is below the three-month average of 30 basis points. The five-year spread has come in dramatically since July 1 when it was 36 basis points. At the time, the spread was above the 32 basis point average.
The 10-year spread held steady at 47 basis points, and remained below the three-month average of 49 basis points. The spread started July at 53 basis points, also the three-month average at the time.
The 15-year spread tightened to 61 basis points from 63 basis points the week before. It remained under the average spread of 64 basis points. The spread has come in from July 1 when it was 65 basis points.
The 20-year California to MMD spread tightened to 61 basis points from 64 basis points the week before. It was also under the three-month average of 65 basis points. Since the beginning of July, the spread has come in from 65 basis points.
On the long-end, the 30-year spread compressed to 57 basis points from 61 basis points and traded under the three-month average of 64 basis points. The spread tightened from 65 basis points on July 1.
Monday, analysts at Interactive Data said a few trades looked weaker but “on the balance it does appear that California is trading higher.” The analyst added, “The tightening has been seen mostly in California GOs but some other names have traded higher as well.”
In a block size trade Friday, a customer bought from a dealer California various purpose 5.25s of 2035 at 4.48%, 21 basis points lower than where they were bought the Friday before.
Bonds from an interdealer block size trade of California 5.125s of 2033 yielded 4.20% Monday, five basis lower than on Friday.
Bonds from an interdealer odd-lot trade of California various purpose GO refunding 5.25s of 2028 yielded 3.95%, three basis points lower than where they traded Thursday.
In another retail size trade, a customer bought from a dealer San Diego Union High School District, in San Diego County, 4s of 2029 at 4.06%, one basis point lower than where the same paper was bought Friday.
Meanwhile continued outflows from muni bond funds are causing some forced selling in the general market. Last week $2.24 billion was withdrawn from funds that report weekly, the second largest outflow of 2013. “There was forced selling from bond redemptions so it seems like the MMD scale is out in front of itself,” the trader said. “It does look like munis are oversold.”
Typically supply is lighter in August, which should help the market stabilize. Though supply is expected to tick up to $8.37 billion this week from $6.07 billion last week, the South Carolina Public Service Authority takes up nearly $2 billion of that.
On the negotiated side, $5.89 billion should be issued this week, up from last week’s revised $4.64 billion. On the competitive calendar, $2.48 billion is expected to be auctioned, up from last week’s $1.43 billion.
“Supply feels lighter than it is and August could be a better time because supply will slow and people will calm down the rest of the summer,” the Los Angeles trader said. “If outflows stop it will give munis a chance to stabilize.”
He added there was not a lot of activity Monday, “but what is trading is at levels that are surprising my traders.”
Still, other traders said Monday felt like a typical summer trading session. “It is light trading and quiet,” a New York trader said. “It’s a muni Monday.” Yields were unchanged from Friday’s levels, he said.
In the secondary market, trades compiled by data provider Markit showed weakening.
Yields on Richmond, Va., 5s of 2029 jumped 10 basis points to 4.03% and Lane, Ore., Community College District 4s of 2020 increased five basis points to 2.22%.
Yields on Wichita, Kan., 4s of 2020 rose three basis points to 2.24% and Texas’ Grand Parkway Transportation Corp. 5s of 2053 increased one basis point to 5.24%.
Monday, yields on the Municipal Market Data scale ended as much as three basis points higher. The 10-year yield rose one basis point to 2.72% and the 30-year yield increased three basis points to 4.25%. The two-year finished flat at 0.43% for the 14th consecutive session.
Yields on the Municipal Market Advisors scale ended as much as two basis points higher. The 10-year and 30-year yields rose one basis point each to 2.93% and 4.33%, respectively. The two-year was unchanged at 0.55% for the third session.
Treasuries were weaker Monday after a strong rally Friday. The benchmark 10-year yield increased three basis points to 2.64% and the 30-year yield rose five basis points to 3.74%. The two-year yield rose one basis point to 0.32%.