Municipal bonds stalled Monday as traders waited to see how primary issuance and a Federal Reserve meeting would affect the market following a weeks-long rally.
Technical analysis bodes well for the market, one New York strategist said, citing inflows into municipal bond mutual funds posted last week, combined with a small calendar of new issues scheduled for the coming week.
"Looks like things are going to be pretty tight looking at the large inflows and low supply," the strategist said. "Technicals are pretty constructive, with a second week of inflows and real low supply levels, traders are fighting for new issue and secondary posting as well."
Mutual funds reporting weekly recorded a second straight inflow Jan. 23 with $86 million placed into the funds, according to Lipper FMI data. The week prior ended 33 straight weeks of outflows with inflows of $103 million.
A dearth of new bonds and persisting economic woes drove municipal yields down last week, capping a three-week really that gave bonds the strongest start to a year since 2009.
"Market dynamics continue to conspire to drive tax-exempt prices up, yields down," according to a Municipal Market Advisors report Monday. "The tailwind from Treasuries has been substantial, pushing the 10-year yield down over 30 [basis points] to 2.70% following benign inflation readings and pain in stocks over [emerging-market] growth and currency worries."
Yields on 10-year triple-A general obligation bonds have fallen around 30 basis points since the beginning of the year, according to Municipal Market Data.
Investors are lamenting a supply-favorable market, as the lack of available paper has forced buyers to take bonds at low yields and high prices.
"It's a good market for the seller," the strategist said. Another week of low issuance could sustain the rally further," he said.
Issuance for the week remains "benign," according to Janney Capital Markets. Volume could reach $4.89 billion, according to Bond Buyer and Ipreo data. Total bond sales last week came to $4.57 billion, according to Reuters.
"Everybody is trying to figure this out, as we don't have supply," a New York-based trader said in an interview. "There are just no bonds around. It's probably too early to tell which direction we're going."
Year-to-date issuance has been $12.8 billion, according to Thomson Reuters data.
"We've come a long way in a short amount of time the past few weeks, I think people need to digest where we are," the trader said. "Last week we kept going lower on yields with light supply and it just kind of fed on itself."
Municipal bonds lost steam Monday as yields edged up before the onset of two of the week's biggest negotiated deals.
Traders said the market started the week slowly even as the two issues - Minnesota Vikings stadium fund appropriation bonds and New York City Municipal Water Finance Authority revenue bonds - were offered to retail Monday.
"Bid-ask spreads are definitely wider today and munis are a little softer," a different New York-based trader said. "We're probably going to wait for some direction from the limited primary market this week."
Minnesota's $467.9 million bond issue, delayed earlier in the month after legal complications, will finance a football stadium for the Minnesota Vikings. The bonds, $397.7 million tax-exempt and $70.26 million taxable, are rated AA by Standard & Poor's and Fitch Ratings.
Yields on the RBC Capital Markets-led deal ranged from 0.37% with a 3% coupon on securities maturing in 2016 to 3.93% with a 5% coupon on those maturing in 2038.
Bonds maturing in 2018 featured a split maturity yielding 0.97% with coupons of 3% and 4%. Bonds maturing in 2015 were offered in a sealed bid. The bonds are callable at par in 2023.
Also in the negotiated market, Raymond James & Associates priced $360 million of New York City Municipal Finance Authority water and sewer bonds.
The bulk of the bonds, $285 million, were offered at 4.31% with a 5% coupon maturing in 2047. Two other sets of 5%-coupon bonds, maturing in 2018 and 2019, were offered at yields of 0.64% and 0.89%, respectively.
Yields on municipal bonds maturing after 2033 rose by as much as two basis points at market close Monday, according to Municipal Market Data's triple-A scale read. Yields on bonds maturing from 2029 to 2032 rose by as much as two basis points.
MMA reported yields were down dropping by as much as two basis points on bonds maturing 20 to 23 years out.
Treasuries softened Monday, with the 10-year and 30-year yields ticking up two basis points to 2.76% and 3.68%, respectively. The two-year was up one basis point at 0.36%.
"We've had a good run over the last several trading sessions so certainly with treasuries being flat, munis are slow," one trader said.
In economic news, the Commerce Department Monday reported sales of new single-family homes decreased 7.0% to a 414,000 seasonally adjusted annual rate in December. The figure is below economist projections of 457,000 December sales, according to a Thomson Reuters poll.
Trades in the secondary market were mixed to stronger, according to data by Markit.
Connecticut special tax obligation transportation infrastructure bonds with a 5% coupon maturing in 2033 were trading with a 3.81% yield, down five basis points from Friday. Yields on Illinois general obligation refunding bonds with a 5% coupon in 2023 fell two basis points to 3.55%.
