The muni yield curve continued to rise on the short end Monday as tax-exempt bonds followed slumping Treasuries and weakened for a fifth day. The bonds have softened every day since Federal Reserve chair Janet Yellen suggested interest rates could begin climbing in early 2015.
The U.S. Treasury curve was the flattest in more than four years on Monday as yields on long-term bonds strengthened while short-term notes weakened.
"Munis are continuing to follow Treasuries since last week's announcement," a trader in Virginia said. "Yields past 10 years are rallying."
The difference in yield between the 30-year Treasury bond and five-year notes was at its lowest Monday since October 2009, with a 183-basis point spread. Municipal bonds weakened throughout the short end of the curve. The same yield comparison within municipals showed the flattest curve since June.
"The muni adjustment continues at the belly of the curve," a trader based in Atlanta said. "It's getting cheaper on the five-year range. In the last three days, there's been the biggest move that I've seen in my 30-year career in the two- to 10-year range."
Supply remains strained as investors find it difficult to identify offerings with an attractive yield.
"The calendar has gotten light again, so I haven't zoned in on any one particular deal," the trader in Atlanta said.
Yields on munis maturing from 2018 to 2020 gained as much as six basis points, while longer-term bonds were steady to somewhat weaker, according to Municipal Market Data's triple-A scale.
"The front end of the market was under fire this morning with some cheap trades," a trader based in Florida said in an interview. "Munis seem to be mirroring Treasuries. The back end of the market is okay. There's a sluggish attempt to support the market."
This week's calendar marks a $1 billion increase in issuance from last week's modest volume of $3.18 billion, though traders aren't rushing to get their hands on any paper.
"Right now with the shape of the Treasury curve and the seasonal period with tax time, the market place is exhibiting light supply," the Florida trader said. "There's very low volume and light apathy."
Interest in Puerto Rico general obligation bonds cooled nine days after the commonwealth's $3.5 billion sale, with GOs representing 44.81% of Puerto Rico bond trades Monday morning, according to MSRB data. The island's Sales Tax Financing Corp., or COFINA, bonds, were the most traded at 47.21%. Zero-coupon COFINA bonds with a 6.69% yield maturing in 2044 were the most active.
"I know the euphoria surrounding the Puerto Rico issuance is somewhat over," Bernard Garruppo, chief executive officer of Granite Springs Asset Management, said in an interview. "My opinion is that you need a long-term solution. They have a bit of breathing room here, but the long- term solution needs to be addressed."
Puerto Rico remains the top issuer in Reuters' Northeast category so far this year, with the commonwealth's $3.5 billion issuance representing 20.3% of all bonds issued in that region.
"We saw trades this morning below the issue price," the Florida-based trader said. "Focus should not be placed on the fact that COFINAs are trading higher, but that Puerto Rico's GOs are underperforming."
The New York City Transitional Finance Authority and the Port Authority of New York and New Jersey are the second and third-biggest issuers, according to the list, with $1.02 and $1 billion in issuance, respectively.
There are no negotiated or competitive deals over $100 million slated for Monday.
A retail order period for $480 million of New York water and sewer system second general resolution revenue bonds began Monday, with institutional pricing slated for Tuesday.
Yields ranged from 2.57% with a 4% coupon maturing in 2022 to 4.13% with a 4% coupon in 2039. The bonds, rated Aa2 by Moody's Investors Service and AA-plus by both Standard & Poor's and Fitch Ratings, are callable at par in 2024. Retail orders for bonds maturing in 2035 and 2039 were unavailable.
"In the negotiated market, there's the New York water deal that I'm keeping my eye on. The bonds have a retail order period that's pricey," a trader said.
Another of the week's largest deals, $705.6 million of Atlanta airport revenue refunding bonds, is set to price Tuesday. Since the bonds have traded well in the secondary market many are interested in seeing how the new issue will be received, traders said.
"Atlanta airport is an attractive deal. It might indicate that spreads are a bit wider than earlier in the month," the Virginia trader said.
The Anne Arundel County of Maryland will issue $206.1 million of general obligation bonds on Tuesday. The bonds are rated AA1 by Moody's, AAA by S&P and AA-plus by Fitch. Virginia will issue $128.27 million of general obligation bonds on Thursday. Traders are interested in seeing what the high grade for these two deals will be.
Yields according to the MMA 5% AAA benchmark showed the most weakening for five- and six-year maturity bonds, which rose five basis points to 1.33% and 1.64% respectively.
Treasury yields remained relatively steady with the two-year at 0.45%, the 10-year at 2.74% and the 30-year at 3.57%.
Secondary market trading showed mostly weakening, according to data provider Markit.
The Bennett Valley, Calif., Union School District general obligation bonds with a 5% coupon maturing in 2043 gained one basis points in yield to 4.35%. The state of California's various-purpose general obligation refunding bonds with a 5% coupon maturing 2024 rose two basis points to 1.69%.
University of Texas revenue financing system refunding bonds with a 5% coupon maturing in 2026 inched up five basis points to 2.80%, while Texas A&M University revenue financing bonds with a 5% coupon maturing in 2024 climbed one basis point to 2.11%.
