Municipal bonds were insulated from weakening Treasury prices Thursday as low supply kept yields competitive in the secondary marketplace.
Refunding volume so far this year is $7.77 billion, down 68% from this time last year, when refundings comprised $24.3 billion of new issues. New-money volume has increased 30% to $22.6 billion from $17.3 billion. Volume overall is 35% lower than at this point last year, according to Thomson Reuters data.
Heavy cash reserves and a lack of new supply have helped keep yields low on new issuance so far this year, market participants said. The declining supply of bonds in the secondary has kept muni yields from jumping as high as Treasuries in some cases, traders said.
"Demand, which is greater than it was almost all last year, is keeping yields pretty tight and I think that's what we're seeing here, even as there are some cuts in reaction to Treasuries being off," one financial advisor on the west coast said. "When you have as little in supply as we've had this year, it's going to drive secondary prices and a lot more people scraping around for a lot less paper that's out there."
Slipping municipal bonds, which gained as much as two to three basis points Thursday, according to Municipal Market Data, may reflect the market's preparation for a slate of large new issue deals next week, traders said. A softer market would mean more attractive yields for buyers.
"I think we're focused on the larger calendar next week, setting up for the deals," the advisor said. "There's a lot of money out there looking for new issues, I don't think it's going to be that much of a stretch to place all of this."
Treasury yields jumped Thursday, with the 30-year climbing five basis points to 3.68% and the 10-year benchmark by four basis points to 2.74%. Two-year notes gained two basis points to 0.36%.
"Spreads have tightened across the board over the last two months," one Chicago-based trader said in an interview. "The treasury market with tapering has become less volatile, and credit products are more comfortable in the interest rate environment we are in. When you combine that with lower volume, yields become tighter."
Yields on municipal bonds rose Thursday morning after the U.S. government reported fewer jobless claims than were expected by economists.
Initial jobless claims fell 26,000 to 323,000 claims in the week ended March 1, beating the 338,000 average of economists polled by Thomson Reuters, according to data from the Labor Department, released Thursday.
Many in the marketplace attributed high claims in the past month to harsh winter weather that hit much of the Eastern U.S.
While the long-term outlook issuance remains dim, municipal bond traders are preparing for a relatively heavy slate of issuance next week that includes the much-anticipated $3 billion Puerto Rico bond deal.
Eager buyers got a taste of some new bonds this week, as issuance climbed to more than $5 billion in the primary market.
The week's biggest deal, $1.15 billion of Texas Transportation Commission State Highway refunding bonds, was priced for retail Thursday.
Final yields on the Piper Jaffray-led bonds ranged from 0.47% with a 4.75% coupon in 2017 to 3.57% with a 5% coupon in 2034. The bonds are callable at par in 2024. An earlier version of the pricing wire showed the 4.75% bonds in 2017 selling at one basis point higher.
Of the $1.15 billion of bonds, $300 million is new paper, while $892 million were refunding bonds.
Also in the negotiated market, Piper Jaffray held pricing for $104 million of Memphis, Tennessee general improvement refunding bonds. The deal was repriced at yields as much as two basis points lower on the short end.
Final yields on the bonds ranged from 0.40% with a 5% coupon maturing in 2016 to 2.95% with a 5% coupon in 2025. The bonds are callable at par in November 2023.
New issuance this week has given participants the opportunity to buy, even while the market continues to weaken from Tuesday, when bonds hit the most expensive levels since 2011. Heavy cash reserves and a lack of new supply have helped keep yields low on new issuance so far this year.
"Although new issue volume at about $5.5 billion is higher this week than in February weeks, the forward calendar remains modest, with $2.8 billion Puerto Rico listed for next week, accounting for more than half of next week's slate," Janney Capital Markets said in a report Thursday.
Citigroup Global Markets won the bid for the Monmouth County, New Jersey deal totaling $89 million. The deal consisted of $80.9 million of general obligation bonds, for $5.3 million of county vocational school bonds and $2.9 million of county college bonds.
Yields for the $80.9 million of general obligation bonds range from 0.13% with a 2% coupon maturing in 2015 to 3.25% with a coupon of 3.25% in 2029. The bonds are callable at par in 2024.
Municipal bond yields measured by Municipal Market Data's AAA scale were up as much as three basis points Thursday on bonds maturing beyond 2029. Bonds maturing on the short end of the curve were unchanged while intermediate bond yields gained as much as two basis points.
Municipal Market Advisors reported bond yields weakening by as much as three basis points on bonds maturing from 2033 to 2035, as well as in 2040.
