Rallies in California general obligation bonds and New York City Water and Sewer bonds may be running out of steam after yields declined.
The California GOs with a 5% coupon maturing in 2028 and New York Water and Sewer bonds with a 5% coupon in 2047 have received heavy investor demand, but their yields have fallen enough in 2014 for investors to question their continuing value, traders said Monday.
"Long 5% coupon New York Water and Sewer and Cali GOs may have hit the ceiling," a trader in New York said.
The California GO's yield was 3.14% on Monday, down 36 basis points from 3.5% when it was first issued on March 13, according to data provided by Bloomberg. Yields for the NYC Water and Sewer bonds are 4.19%, a drop of 61 basis points from 4.8% yield on Jan. 2, the first day trading day in 2014.
"Their absolute levels are too high, and their ratios are also getting too high," the trader in New York said. "New York Water and Sewer for the 5/47 was at 3.99% on Friday."
The NYC Water and Sewer bond's yields advanced to 4.57% this month on April 10, and immediately fell back to 4.24% the next day they traded on April 16. The Cali GO's yields did jump up to 3.4% on April 8, but fell back down to 3.14% the following trading day on April 11. The Cali GO's have remained at that level for the majority of April, according to data provided by Bloomberg.
Barring an upgrade for California, its debt and the big New York issues "have run their course," a trader in Chicago said. "The Cali and New York Water and Sewer bonds do not present a whole lot of upside."
Yields rose across the curve on Monday, increasing by two basis points for four-to five-year maturities, one for six-to 27-year maturities, and two basis points for 28-to 30-years, according to data provided by Municipal Market Data's Triple-A Index.
Municipal Market Advisor's data showed the two-year held steady at 0.38%, the 10-year rose by one basis point to 2.32% and the 30-year by two basis points to 3.65%.
"There is an equity rally, and muni prices are falling somewhat slowly," the trader in New York said.
The Dow Jones Industrial Average increased 86.76 points, or 0.5 percent, to 16,448.22. Pharmaceutical giant Pfizer's renewed bid to buy out British-Swedish pharmaceutical and biologics company AstraZeneca for $98.9 billion prompted this increase, according to the Wall Street Journal.
Long-term municipal bonds performed well last week. Yields for the 30-year fell five basis points to 3.63% on the 30-year at the close Friday from Monday's close, according to data provided by Municipal Market Advisors.
The Standard & Poor's Dow Jones index showed high-grade municipal bonds maturing in 20-years on Thursday had a 10.2% return year-to-date, with yields dropping more than 65 basis points year-to-date.
"I think the municipal market is a tad softer on Monday," the trader in New York said. "We got a pretty good rally last week and I think investors are hesitant about whether that will continue this week."
Investors also said the modest amount of supply scheduled for this week may hurt market participants searching for high-yield. Total supply scheduled for the week ending May 2 is expected to be $4.5 billion, down from $6.4 billion last week, according to data provided by Ipreo and The Bond Buyer.
"I think investors are looking more for some yield, but there's nothing to be found," a second trader in New York said. "There's basically nothing coming in, there's no supply."
Bond sales for the first three months of 2014 totaled $62.5 billion, down from $84.4 billion for the same three months in 2013, according to The Bond Buyer data.
The low supply has been met with a strong demand for municipal bonds. Municipal funds' flows have been negative only five out of the 17 weeks of 2014, according to Lipper FMI. Fund flows for the week ending April 23 totaled $244.3 million, up from $74 million the prior week.
Janney Capital Markets described inflows to municipal market funds as "consistent if not overwhelming," in a report released on Monday.
"You've got too many people chasing the same bonds, it's very frustrating," the second trader in New York said. "You're getting 15, 20 bids an item. It comes right down to supply and demand."
A third trader in New York said that people are "balking" at the prices deals are coming in at and that yield is hard to find in the secondary.
"If you are looking at the secondary, spreads are probably going to be tighter," he said.
The largest deal expected this week is the $834.5 million of competitive Pennsylvania general obligation bonds scheduled for auction Tuesday. The bonds are rated AA by Fitch Ratings.
Citigroup Global Markets won the bid for $109.6 million of general obligation bonds for the Wayzata Independent School District 284, Minn., the top deal on Monday. Yields ranged from 0.92% with a 1.50% coupon in 2018 to 3.17% with a 3.75% coupon in 2035.
The bonds are callable at par in 2023 and is rated AAA by Moody's Investors Service.
Treasuries weakened Monday afternoon, with the 30-yields climbing four basis points to 3.48% and the 10-year benchmark rising three basis points to 2.70%. The two-year notes were unchanged from Friday's market close at 0.45%.
