Market Close: Momentum Carries Muni Yields Higher in Sympathy with Treasuries

With little activity and no significant issuance Monday, the municipal market settled on Treasuries for direction.

Muni yields followed those of their Treasury brethren, albeit without much conviction and a noticeable step or two behind, traders noted throughout the day. In doing so, the market adopted a slightly weaker tone.

“There was no new issuance to give us guidance, and not a whole lot that was trading today,” a trader in Los Angeles said. “If anything, we were probably off a little bit, in sympathy with Treasuries.”

Treasuries reacted to positive retail sales data. They showed an increase of just 0.1% to $419 billion in April, but handily beat economists’ forecasts.

Recent news in Detroit brought attention to riskier credits, a trader in Chicago said. Detroit Emergency Manager Kevyn Orr on Sunday released a report on the city’s fiscal condition which stated that the restructuring of the city’s debt would be vital for its survival.

Anticipation of the report may have had a greater impact on the muni market overall on Friday than the report itself had  on Monday, the trader said.

“Obviously, Detroit and some of the lower quality [debt] may be under some pressure,” he said. “But there’s some Puerto Rico out for the bid today; it seems there’s more of that out than we’ve seen in a while. So, maybe we see the lower-quality things are feeling the heat from Detroit.”

New issuance, which continues to be slight compared with this time last year, isn’t providing any direction. This week, $6.45 billion is expected to reach the market. This represents an increase from last week’s revised $5.24 billion.

The industry expects to see $5.05 billion in negotiated deals, up from last week’s revised $3.27 billion. On the competitive calendar, $1.40 billion should be auctioned, a decline from this week’s revised $1.97 billion.

No deals top $400 million, however. A deal consisting of airport revenue improvement bonds for Dallas-Fort Worth International Airport, at $366.0 million, and a Los Angeles deal expected Tuesday for wastewater system revenue bonds, at $344.4 million,  , should lead all issues.

The municipal market largely paused to catch its breath following the pounding it withstood Friday. But that doesn’t mean the market stood still. By midday, participants reported activity in trades of smaller size, as the market overall is slackening somewhat to get deals done, the trader in Chicago said.

“We got whacked on Friday,” he said. “We’re all reeling, trying to figure out where we’re at now. Consequently, I don’t think there’s been a lot of change. We’re fairly flat. People are more active today; I’m getting more interest in my smaller pieces than I did last week.”

Last week ended as the second consecutive one where muni yields outperformed Treasuries by rising less rapidly amid modest supply, JPMorgan muni analyst Peter DeGroot wrote in a research report.

Current muni ratios to Treasuries show that, from current ratios — the 10-year closing Monday at 93.8% — munis are likely to trail Treasuries in a falling-rate environment. To a lesser degree, tax-exempt yields will probably catch up with the recent large moves seen in Treasury yields if rates stabilize.

“A continued increase in U.S. Treasury yields will likely result in continued outperformance for the municipal market,” DeGroot wrote.

This week’s long-term supply is expected to arrive weighing far less than the $7.9 billion of bonds issued in the comparable period in 2012 and below the $7.1 billion year-to-date non-holiday week average, for a fourth consecutive week, DeGroot wrote. This amount of issuance supports “solid distribution,” particularly if rates settle in at these higher levels, he wrote.

Seasonal factors in the muni market that in April revolved around tax season are set to shift yet again. The move should bring a stronger tone to the market in the coming months, John Dillon, chief municipal bond strategist at Morgan Stanley Wealth Management, wrote in a research report.

Bond redemptions should rise and new-issue supply typically falls during the summer months. As the time for more favorable June redemptions approaches, he wrote, industry pros seem aware of the trends and grow increasingly confident.

“With this concept in mind, individual investors interested in putting cash to work should keep an eye out for robust issuance weeks (plus-$8 billion) in the near future and while municipal bond mutual fund flows have yet to regain positive momentum,” Dillon wrote.

The market still appears healthy, the trader in Los Angeles said. “The market probably feels OK, given the June-July roll that’s coming up, and light supply that we have,” he said. “But there’s just nothing to get some activity going here.”

Activity or not, the market weakened somewhat Monday, according the market scales. Muni yields were mostly steady through 16 years on the curve; beyond that, they were up to two basis points higher.

“The general market is reasonably flat, maybe a smidge easier to get something done,” the Chicago trader said early Monday afternoon. “But if you adjusted your levels from Friday to today, you’re starting to see some business.”

Yields on the Municipal Market Data triple-A GO scale finished up to one-to-two basis points higher Monday. The two-year and the 10-year yields held steady at 0.28% and 1.81%, respectively. The 30-year yield ticked up two basis points 2.95%.

Yields on the Municipal Market Advisors 5% scale started the week slightly higher. The 10-year and 30-year yields inched up one basis point each to 1.86% and 3.07%, respectively, on Monday. The two-year yield remained unchanged at 0.33%.

Treasury yields closed Monday’s session higher past the front end of the curve. The benchmark 10-year yield increased three basis points to 1.93%.

The 30-year yield also rose three basis points, to 3.13%, after vaulting 11 basis points on Friday. The two-year yield remained at 0.25%.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER