The municipal market apparently had nowhere to be Monday and no interest in getting there.
Thin support for deals near the end of last week rolled over into Monday’s session, traders said. This factor, combined with a small build-up in the secondary and a generally weak bond market, gave way to a weary muni market marked by relative inactivity.
“There was a little thinner support for deals late last week,” a trader in San Francisco said, “and that led to a flat-liner today.”
Retail and institutional buyers have been hesitating with some of the structures they’ve been seeing of late, he added. In addition, otherwise robust institutional buying has stalled for a time at the long end of the curve.
“There’s a little bit of build-up of secondary-market supply, because of structures that have been used that apply to retail,” the San Francisco trader said, “and retail has backed off a little bit.”
Throughout the day, light issuance and the small amount of activity in the secondary muddied traders’ view of the market. Smaller competitive loans and a few customer bid-wanteds left yields unchanged from where they parked at the end of last week.
Still, those smaller competitive loans that sold earlier in the session did reasonably well, a trader in New York said. Basically, though, traders were left scratching their heads for a clearer picture.
“The market is probably unchanged in very quiet trading,” he said. “It’s really tough to tell. There are some customer bid-wanteds that look like they’ve gotten some pretty decent numbers on them. But there’s really not a lot of trading going on.”
Market participants mostly geared up for the week’s larger deals, traders said, which are set arrive Tuesday.
The primary market should see a total of $7.64 billion in supply this week. That compares with a revised $7.44 billion last week.
The weekly volume numbers approximate the amount the market has been seeing lately. Industry watchers expect the calendar to be absorbed easily.
A $1.5 billion taxable deal for the Catholic Health Initiative, in Colorado, should pace all deals this week. Almost $900 million of Honolulu city and county general obligation bonds in seven series should also pepper the docket.
A deal for $550 million in California GO refunding bonds is expected to lead all competitive issues.
On the negotiated side of the ledger, Siebert Brandford Shank & Co. priced for retail $140.9 million of Metropolitan St. Louis Sewer District Wastewater System refunding revenue bonds. The bonds are rated Aa1 by Moody’s Investors Service, AAA by Standard & Poor’s and AA-plus by Fitch Ratings.
Yields ranged from 0.39% with a 3.00% coupon in 2015 to 2.75% priced at par in 2031. Credits maturing in 2025, 2026, 2028 through 2030, and from 2032 through 2034 were not offered to retail. The bonds are callable at par in 2022.
Because municipal yields outperformed those of Treasuries last week across the curve, muni ratios to Treasuries for the 10-year and 30-year dropped below 100%. But as yields have been rising somewhat, investors shouldn’t be too discouraged by the falling ratios, a trader in Dallas said.
Investors remain hungry for new paper, so they would likely take their cues from those underwriters and issuers who see the 20-year triple-A yield at 2.46% and the 30-year at 2.86% as low costs in which to issue debt. Even at these persistently low rates, the trader added, certain banks and institutions will participate actively when quality issuers come to market with good product.
“The underwriters are catching their breaths, as much as anything,” the Dallas trader said. “I don’t think the low interest rates are really hampering the market. If anything, it’s all on the issuers and underwriters; if they put product out there, people are going to buy it.”
Ratios, though, have been affected by the nature of issuance in 2012, specifically, the amount of refundings, Peter DeGroot, a municipal strategist at JPMorgan, wrote in a research report. The elevated amount of refinancings has changed the term structure of issuance.
“Issuance in the belly of the curve has risen relative to long dated municipal issuance with supply in the 10-year area higher by 5% while the 30-year spot fell by 7% versus pre-[Build America Bond] five-year average issuance,” he wrote.
The proportionate increase in re-fis has swelled 15- to 25-year ratios. But more striking, he added, the 10-year and 30-year ratios have inverted their historic levels on the curve, bringing new opportunities.
At Friday’s close, the 10-year stood at 98.3% and the 30-year at 97.3%. Meanwhile, in the five years that preceded the credit crisis, the 10-year ratio on average hovered 9% below that of the 30-year ratio, DeGroot wrote.
“The current rate environment continues to be supportive of the 30-year portion of the curve in that it is additive to fund inflows, incentivizes investors to reach for yield, and as discussed above incentivizes intermediate term refunding issuance,” DeGroot wrote. “At least for the next year, given our current rate forecast, we expect refunding volume to continue to be elevated. This would result in issuance with a similar maturity distribution and a ratio curve that is consistent with today’s ratios.”
Still, he added, the 10- to 25-year parts of the yield curve should outperform the 30-year section over time. The flat curve in 10-years and longer signifies better future total return performance in 10-to-25 years, compared with longer structures. And this area of the curve “also shows better roll and less extension risk than points further out,” DeGroot wrote.
Munis finished Monday flat for a third consecutive session, according to the Municipal Market Data scale read. The benchmark 10-year yield froze at 1.74%.
The 30-year yield held steady at 2.86%. The two-year remained at 0.30% for the 19th consecutive trading session.
Treasuries yields moved little after weakening in the morning. The benchmark 10-year yield rose three basis points to 1.80%.
The 30-year yield climbed two basis points to 2.96%. The two-year yield ticked up one basis point to 0.31%.