The tax-exempt market ended unchanged on Wednesday, continuing what traders have called a very slow week.
With little direction from Treasuries, limited supply, and yields near their all-time lows, trading has stalled as traders wait for an incentive to trade.
“It’s very slow,” a trader in Chicago said. “The secondary doesn’t have direction and with no primary to take cues from, we’re just stagnant. Market players are looking for any direction from anywhere they can find it.”
He added a few months ago, munis were being driven by Europe, but munis are now driven by U.S. politics and the election. “These days it’s the conventions people are looking at,” he said. “Either way, right now the trading volume isn’t deep enough to drive it one way or another.”
Other traders said activity was slow, but munis felt firmer because of the supply and demand imbalance. “The market seems OK,” a New Jersey trader said. “Treasuries are off a little but munis don’t want to go down. It’s still relatively firm. Maybe flat from yesterday or maybe even in pocket areas up one basis point.”
He added some traders are forcing trades because there hasn’t been a lot of movement over the last week and they are trying to move bonds. “But it’s few and far between,” he said. “So it’s a grind. Overall the market is sideways to firmer a touch.”
Although Treasuries are off, munis are being driven by supply and demand factors. “There is limited supply. It’s the same names over and over again so people are trying to look for new product to come in. And when you get a new offering, you’re looking at it aggressively, but the stale stuff in the market is still sitting there,” the trader said.
Going forward, the trader expects it to remain fairly light through election season.
“It should be relatively light and then issuers will cram it all in at the end of the year.”
In the primary market, Morgan Stanley priced $161.2 million of city of Chula Vista, Calif., industrial development revenue refunding bonds for the San Diego Gas and Electric Company, rated Aa3 by Moody’s Investors Service, A-plus by Standard & Poor’s, and AA-minus by Fitch Ratings.
The bonds were repriced at par to yield 1.65% in 2018 and are callable at par in 2015. In preliminary pricing, the bonds were priced at par with a 1.75% coupon.
JPMorgan sold an additional $75 million of 2004 Series F bonds, subject to the alternative minimum tax, for the same issuer. The bonds hold the same ratings and were priced at par to yield 4.00% in 2039. The credit is callable at par in 2017.
In the competitive market, Citi won the bid for $229.9 million of Florida Board of Education public education capital outlay refunding bonds, rated Aa1 by Moody’s and AAA by Standard & Poor’s and Fitch.
Yields ranged from 0.40% with a 4% coupon in 2014 to 3.04% with a 4% coupon in 2033. The bonds are callable at par in 2022.
On Wednesday, the 10-year Municipal Market Data yield closed steady at 1.73% while the 30-year yield finished flat for the fourth session at 2.89% and the two-year closed at 0.29% for the 29th consecutive session.
The 10-year yield now hovers only 13 basis points above its record low of 1.60% set July 26. The 30-year trades only 10 basis points above the 2.79% record low set July 25.
Treasuries weakened for the second consecutive session. The two-year and benchmark 10-year yields rose one basis point each to 0.25% and 1.59%, respectively. The 30-year yield jumped two basis points to 2.70%.
In the secondary market, trades compiled by data provider Markit showed a mix of stronger and weaker trades. Yields on Connecticut 5.85s of 2032 jumped seven basis points to 3.86% while Dallas Fort Worth International Airport 4s of 2032 increased three basis points to 4.09%.
But other trades showed strengthening. Yields on Chicago O’Hare International Airport 4s of 2027 dropped three basis points to 4.03% while Ohio’s Buckeye Tobacco Settlement Financing Authority 5.875s of 2047 fell two basis points to 7.42%.
Indeed, secondary trading activity was slow. “Bored, uninspired, stagnant are all some of the cleaner adjectives to describe the muni market the last several weeks,” wrote Dan Toboja at Ziegler Capital Markets. “The primary calendar has not been robust enough to meet all the demand with the piles of cash customers have, and few participants are willing to chase bonds on the secondary. Engagement has been the challenge in this market and short of a macro shock that cheapens up the fixed income market generally, supply is the driver in this market.”
Many traders say activity slows as yields fall because it is harder to make money as spreads compress and resistance against record low yields set in. Indeed, yields and credit spreads declined in August, leading to a drop in trading activity, according to retail bond trading firm BondDesk Group.
The firm noted in a monthly report about trading activity in August that the average yield on all bonds of all maturities and ratings dropped below 3%, hitting a 12-month low. With that, the average daily trade volume fell as well as the buy-to-sell ratio for the second consecutive month.
But munis did not follow Treasuries. Over the month of August, Treasury yields increased, prompting a jump in trading volume and a higher buy-to-sell ratio compared to July, BondDesk Group said.