Market Close: Munis Stall as Detroit Bankruptcy Keeps Investors at Bay

Traders of tax-exempt municipals had a sluggish start to the week Monday as investors weary from Detroit’s historic bankruptcy tiptoed around small issue volume.

“All the way around the market has a bad tone to it,” one trader in Dallas said. “The dealers are still reeling from the hits they took last week, and they’re reluctant to underwrite deals. With Detroit’s bankruptcy and the downgrade of Chicago to A3, it was kind of a double whammy. It was just a slow day.”

The market was very quiet, with few deals priced and people trading very cautiously, the trader said. Deals scheduled to enter the market later in the week will give a better indicator of the municipal market’s health, he said. A trader in the southwest echoed those sentiments.

“It feels pretty dead,” the trader in the southwest said. “We’re fighting against muni outflows because of what’s going on with Detroit. But with ratios this cheap, I’m not sure how long retailers will hold out, there’s just not much demand, when you consider where the ratios are and the relative value that munis offer.”

Municipal bond mutual funds reported outflows for an eighth week last week, according to Lipper FMI. Those funds that report flows weekly recorded outflows of $1.56 billion from muni bond funds for the week ended July 17, the data show, up from the $1.20 billion investors withdrew the previous week.

“I think lower-quality stuff may be hurting a little bit after Detroit,” a trader in Chicago said in the afternoon. “People are hesitant. We’ve had different shocks to the system before, but this was a slow-moving accident and now we’re cleaning up the mess.”

The trader added that he sees bids coming in more cautiously than normal.

Though Detroit’s problems have been long in the making, Friday’s bankruptcy announcement still may be keeping retail investors at bay, a trader in New York said earlier in the day.

“The Detroit news is settling in for the first time with retail investors,” one trader in New York said Monday morning. “People were out on a very hot Friday, pushing it aside, and this will be the first week seeing how the Detroit news spills into the market. So far it’s not a huge impact, but the retail investor does get scared.”

Traders agreed that any lasting effects of Detroit’s bankruptcy on the municipal market will be clearer once new deals enter the market this week.

“We may still be getting some retail reaction from the Detroit bankruptcy --it’s hard to tell,” a trader on the west coast said. “I think it’ll take at least a few days to see what kind of ripple effect Detroit and outflows from funds has, those are going to have the biggest effect.”

In the secondary market, trades compiled by data provider Markit showed weakening, including a jump of 10 basis points in yield on Louisiana Tobacco Settlement Financing Corp. 5.25s of 2035  to 5.40%.

This week’s calendar is scheduled to be lighter than the previous week, according to estimates from Ipreo LLC and The Bond Buyer. Potential volume for this week is expected to total $5.54 billion, down from total sales of $8.32 billion last week.

Negotiated sales this week are expected to total $4.30 billion, compared with a revised $6.33 billion last week. Bonds scheduled for competitive sale this week will reach $1.24 billion, down from $1.99 billion sold last week.

Pressure was applied to the market as a result of last week’s muni bond outflows, as well as a disconnect on Friday between stronger treasuries and weaker muni yields. That disconnect continued on into Monday, as the ratio between treasuries and muni yields widened.

Treasury yields continued to be somewhat firmer along the curve on Monday, with the benchmark 10-year yield at 2.49%, down three basis points from 2.52% on Friday. The 30-year fell five basis points to 3.55% from 3.60%, while the two-year yield fell a basis point to 0.30% from 0.31%.

Tax-exempt yields were mostly unchanged, according to the Municipal Market Advisors 5% scale. Yields were unchanged between one and 13 years, while those with yields 14 years and beyond climbed a basis point.

“After last week’s selloff, the long-end is appearing better positioned for near-term strength,” Municipal Market Advisors said in a Monday report. “Loses from Detroit are just not sustainable. However, anything more than a minor move is unlikely.”

Most yields on the Municipal Market Advisors 5% scale weakened Monday by one or two basis points. The 10-year yield increased a single basis point to 2.85%. The 30-year yield jumped a basis point to 4.22%. The two-year steadied at 0.53% for the fourth straight day.

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