Municipal bonds remained firm as the year's biggest week of issuance drew to a close.
Buyers of tax-free municipals had been waiting for a week of substantial supply after the smallest February issuance in more than a decade, and the market proved capable of handing the new bonds.
"We held ground in the face of the largest issuance so far this year, maybe even the most in six months," one trader on the west coast said in an interview. "There was a ton of supply that we expected was going to help the market form a price discovery standpoint and it clearly did."
Bond sales this past week reached $11.4 billion, according to data from Thomson Reuters, including $10 billion of negotiated bonds and $1.36 billion of competitive deals. The week's biggest and most talked-about deal was $3.5 billion of Puerto Rico general obligation bonds.
"We got through that Puerto Rico and took away a lot of market concern there," the trader said. "And now there's limited supply again, the technicals look good."
Municipal bond yields continued firming Friday afternoon, following a late-day rally in Treasuries Thursday.
Yields were as much as five basis points lower on bonds maturing in 2024, according to Municipal Market Advisors. The Municipal Market Data AAA 5% scale also showed yields falling by four to five basis points.
Treasuries were steady Friday morning, after strengthening by as much as six basis points Thursday. The 30-year benchmark yield ended the week at 3.60%, down eight basis points from this time last week. The 10-year yield was at 2.65%, nine basis points lower than the previous Friday. Two-year note yields were unchanged around 0.355.
"Strength has to do partly with how well the deals went this week now that that's over with, as well as following Treasuries a little bit now," Dawn Mangerson, managing director and senior portfolio manager at McDonnell Investment Management, said in an interview. "Munis are taking a nice sigh of relief."
The municipal market has been starved for paper the first two months of 2014. This week's heavy issuance slightly boosted total assets of weekly reporting municipal mutual funds to $282.2 billion from $281.69 billion, according to data provided by Lipper.
"We just made it through a very big week and yet the Muni Market Data scale didn't adjust upward," said a managing director based in New York. "My feeling is that the market took the supply very well. The demand seems to be there. Muni yields crept lower through the week. There has been a resilient demand for munis even with an increase of supply."
The New York State Mortgage Agency issued a three-tier deal Friday for $123.8 million of homeowner mortgage revenue bonds all priced at par.
"As people do their taxes they will realize that munis are a good investment. Over the next few months we'll go back to moderate supply probably until October. This week the market handled supply pretty well," said the managing director based in New York.
Compared to last month, yields were unchanged to marginally lower throughout the yield curve, said managing director John Dillon and chief bond strategist at Morgan Stanley in a report.
