The municipal bond market was quiet Thursday as a lack of new issuance kept many investors either out of the market or trading in the secondary.
"Lately it's been like watching paint dry," one trader in the northeast said. "I'd rather be watching curling on TV."
With just $2.28 billion of issuance expected this week, traders jumped on the small selection of new deals offered for institutional pricing Thursday. Trading activity was down 8.8% from the average volume at market close, according to Bloomberg data.
"Supply is low because refundings have subsided considerably," Bernard Garruppo, chief executive officer of New Jersey-based Granite Springs Asset Management said in an interview. "The uptick in interest rates toward the end of 2013 has significantly impacted supply - we had rates so low for so long I think most issuers took advantage of that."
Refunding volume in the coming year is projected to be lower, according to a January survey by The Bond Buyer. Bond dealers expect 2014 to be the second-worst year for municipal issuance in a decade, and some predict the lowest volume since 2000 as the Federal Reserve changes monetary policy to favor higher interest rates.
Gross new volume this year will total $296 billion, down 10% from 2013, according to the median estimate of seven leading municipal bond underwriters.
The demand on the investing side has been there, traders said, and the introduction of some new deals could show a strengthened market.
"Taking Puerto Rico and Detroit out of the equation, I don't people are as considered about credits and higher taxes will create stronger demand for municipals," Garruppo said. "The big issue is limited supply going forward."
There are no negotiated bond issues $100 million or larger scheduled for the remainder of the week, according to data from Thomson Reuters and Ipreo. There was just one competitive issue larger than $100 million, $140.2 million of Oyster Bay, New York, bonds slated for Thursday.
Citigroup Global Markets won the bid for the Oyster Bay bonds, rated A-minus by Standard & Poor's, and carrying an AA-minus rating from Assured Guaranty.
Yields on the bonds ranged from 0.25% with a 3% coupon in 2015 to 3.75% with a 4% coupon in 2028. The bonds are callable at par in 2021.
"Supply-demand balance is favorable given light new issue volume and modest inflows to muni funds," Janney Capital Markets said in its morning report Thursday.
Municipal mutual funds tracked by ICI registered $162 million of net new assets in the week ending Feb. 12, according to Janney.
"Five consecutive weeks of inflow are encouraging, but the $235 million weekly pace is modest compared to an average $2 billion weekly outflow in the June through December period of 2013," Janney's Alan Schankel wrote.
Issuance this week was led by $400 million Morgan Stanley-led Metropolitan Transportation Authority deal and $201 million of Citi-led Louisiana highway bonds.
Goldman Sachs, & Co. announced and priced a $222.5 million of University of Texas bonds in the middle of the week. Yields on the final pricing ranged from 0.32% with a 5% coupon maturing in 2016 to 3.8% with a 4% coupon maturing in 2033. Earlier, those bonds priced with yields of 0.35% and 3.85%.
Initial claims for U.S. state unemployment benefits fell 3,000 to 336,000 in the week ending Feb. 15, a drop consistent with what economists had predicted. The previous week's figure of 339,000 was not revised
The four-week average of claims climbed to 338,500, 6,250 higher than this time last month.
Treasury yields were higher Thursday morning, led by the two-year yield, which climbed three basis points to 0.34%. The benchmark 30-year Treasury was up three basis point to 3.73%, while the 10-year climbed four basis points to 2.77%
Yields on bonds maturing in 2030 and from 2037 to 2038 lost one basis point, according to Municipal Market Advisors. Yields on muni bonds were steady throughout the curve, according to Municipal Market Data.
In the negotiated market, Morgan Stanley held institutional pricing for MTA bonds that took retail orders on Wednesday.
Yields on the MTA bonds offered Thursday fell by two to three basis points from retail pricing. Yields were 0.46% on 2%-coupon bonds maturing in 2015 and 4.16% with a 5.25% coupon in 2034.
A lack of new money available in the marketplace has kept trading activity muted as Puerto Rico bonds continue to play a large role in market activity as the government there looks to prove its stability.
"MSRB trading volume was moderate Wednesday at $7.3 billion, and Puerto Rico trailed only NY, CA and TX in the level of trading activity," Janney Capital Markets said in a report Thursday morning.
Puerto Rico bonds were the fourth-most active traded bonds Thursday, according to Bloomberg Data. Puerto Rico was the only region in which dealer-to-client exchanges were net buys.
Louisiana bonds saw the biggest uptick in popularity from normal trading volumes, with highway improvement bonds with a 5% coupon maturing in 2031 the most actively traded. Yield was 9.08%.
