Empty desks and some 11th-hour tax-swap bids ensured that the municipal bond market would close the year's last trading day with a whimper.
The end to a tumultuous 2013, particularly for troubled municipalities such as Detroit and those in Puerto Rico, passed with no surprises. Those few market participants who remained at their stations Tuesday said that tax-loss swaps and even Puerto Rico paper,
"There definitely is still some last-minute tax-swapping going on, but it's not the same kind of fury as last week, or even yesterday," a trader in New Jersey said. "It's very minimal stuff going on right now. Even Puerto Rico is quiet. Some off the bigger guys that are out there that have been putting a ton of bid-wanteds for Puerto Rico have been quiet today; they're not putting them out. So, there's a little less than there has been."
Investors looking to execute anything last-minute in the holiday-shortened session had to reach in price, a trader in New York said. Still, market gauges and traders agreed that muni price levels held throughout the day.
"Some people are trying to do tax swaps," he said. "Anyone here who's bidding is trying to buy something at a cheaper price; I'm looking to buy something cheaper, especially if someone is trying to do early settlements."
The bid side surprisingly held up all month, despite light issuance and persistent credit headlines, said Duane McAllister, co-manager of the BMO intermediate tax free fund, at BMO Global Asset Management U.S.
"Overall, the market has done reasonably well this month, considering all the challenges it's faced," he said.
In January, and overall, the trend seems to be in place that rates will continue to head higher, but not appreciably, he added. Yields have already made progress on that front this year, with the 10-year triple-A yield jumping 99 basis points in 2013 and the 30-year triple-A rocketing 133 basis points over the span.
What's more, McAllister added, muni levels are approaching an inflexion point that would bring more interest and demand into the market. The long end possibly requires an increase of between 30-or-40 basis points on the curve to reach that point, he said.
"And while I don't know if that's going to happen, it's not alarming, and would be welcomed by lots of investors," McAllister said. "We're not bullish, by any sense, but we're also not suggesting people avoid munis. There are people writing about good value, particularly at the long end of the curve."
This depends, to a large degree, on equities. If they continue their hot hand and march higher, then munis are likely to see interest rates trend higher, as well, he added. Any meaningful correction in stocks would compel investors to park their money in tax-exempts, McAllister said.
No muni bond issuance is expected this week; few muni participants are in the office ahead of the New Year's holiday, sidelining most of the Street. Less than $1 million of competitive offerings is scheduled for auction.
The demand side has provided no support, as muni bond mutual funds recorded a 31st straight week of outflows for the week of Dec. 25, according to Lipper FMI numbers. Weekly reporting funds recorded outflows of $1.49 billion; long-term muni bond funds accounted for an increasing percentage of the hemorrhaging, at $1.15 billion.
Credit quality, highlighted by struggling municipalities such as Detroit, Chicago and Puerto Rico, gripped investors' thoughts throughout the second half of the year, if not exactly on the day's trading.
On the whole, however, even though headlines of municipal bankruptcies abounded in 2013, the fundamental credit quality of the muni market remains healthy, and bankruptcy filings rare, Elizabeth Foos, municipal credit analyst at Morningstar, wrote in her quarter-end insights.
Furthermore, the degree of stress many municipalities showed recently brought into question the market's overall credit quality, as well as the prospect of funding long-term liabilities, she concluded.
"The questions are complex, with the answers coming on a case-by-case basis through detailed analysis of state statutes and through judicial decision," Foos wrote. "We'll continue to watch these high-profile cases to understand how they may influence each other and to further our understanding of how they could affect bondholder risks and recovery rates."
Trades in the secondary market were mostly stronger on Tuesday, according to data from Markit. Miami-Dade County general obligation 5s of 2030 plunged four basis points to 2.61%.
Massachusetts State Health and Educational Facilities Authority 5.2s of 2028 and Minnesota Special School District One 3s of 2022 fell three basis points each to 3.55% and 2.79%, respectively. Mason, Ohio, sewer system refunding limited tax GOs 5s of 2026 rose two basis points to 3.43%.
Yields on the Municipal Market Data triple-A scale danced in place Tuesday. The triple-A, tax-exempt 10-year closed the day's session steady at 2.77%. The 30-year held at 4.19%. The two-year yield was unchanged at 0.33% for a 32nd straight session.
Yields on the Municipal Market Advisors benchmark triple-A scale on Tuesday also remained unchanged across the curve. The 10-year triple-A yield held at 2.79%, the 30-year at 4.41% and the two-year at 0.36%.
Treasury yields closed the day weaker along most of the curve. The 10-year yield jumped four basis points to 3.02%. The 30-year yield leapt six basis points to 3.96%. The two-year hovered at 0.39%.
