The municipal bond market ended Thursday on a steady to weaker tone as traders said August reinvestment money, coupled by a slowdown in the market from summer vacations, was not enough to buoy tax-exempts.
Throughout the course of the week, traders seemed surprised by the backup in yields given that reinvestment money came due only last week and new issuance was not overwhelming.
“It seems as if there is a lot of competition in the secondary even though it feels like it’s weakening up a bit,” a San Francisco trader said. “But it doesn’t feel that much weaker to me. It feels a little flat.”
He added that there are more items coming out in the secondary and “bids still seem strong.”
“I’m putting traffic largely in the secondary because I’m not finding structures that I like in the new issue stuff,” he said.
In the primary market, the trader said he is seeing a few balances on deals. “And that’s a little surprising. There seems to be a lot of money chasing not that much stuff but it’s still not stronger. I think we may have got a little overbought.”
Other traders said agreed they were surprised with the relatively small amount of activity in the market this week. One New York traders noted the market was steady in the morning, but had a prevailing weaker tone overall for the week.
“It’s not necessarily weaker this morning, but it’s slow,” the trader said. “There are a lot of vacations and people are holding off until September.”
One analyst said the market has been quiet with softer demand, driven in part by vacations, but also from a general distaste of absolute low yields. “In yield, spreads have come in and offerings haven’t followed lockstep,” according to Dan Toboja at Ziegler Capital Markets. “There are some hints of increasing primary supply in the coming weeks and buyers are hoping it will be enough to cheapen the market for reentry.”
To be sure, he said as long as muni bond funds continue to record inflows, supply stays light, muni-to-Treasury ratios remain attractive, and Treasuries remain firm, any sell off will be short-lived.
In the primary market, the week’s remaining deals were priced. Morgan Stanley priced $250 million of Iowa Finance Authority Midwestern disaster area revenue bonds, rated Baa3 by Moody’s Investors Service and BBB-minus by Standard & Poor’s and Fitch Ratings.
The bonds yielded 4.75% priced at par in 2042 and are callable at par in 2022.
Bank of America Merrill Lynch priced for institutions $225 million of Metropolitan St. Louis Sewer District revenue bonds, rated Aa1 by Moody’s, AAA by Standard & Poor’s, and AA-plus by Fitch.
Yields ranged from 0.55% with a 4% coupon in 2016 to 3.13% with a 5% coupon in 2042. The bonds are callable at par in 2022.
Morgan Stanley priced $192.6 million of Indiana Finance Authority first lien wastewater utility revenue bonds for the CWA Authority Project, rated A1 by Moody’s and AA by Standard & Poor’s.
Yields ranged from 0.49% with a 4% coupon in 2014 to 4% priced at par in 2042. The bonds are callable at par in 2022.
In the secondary market, trades compiled by data provider Markit showed mostly weakening. Yields on Champaign, Ill., 2s of 2024 and Orlando, Fla., Utilities Commission 5.25s of 2022 jumped four basis points each to 1.96% and 2.20%, respectively.
Yields on New York City Municipal Water Finance Authority 5s of 2027 increased three basis points to 1.02% while Massachusetts Health and Educational Facilities Authority 4.125s of 2037 rose two basis points to 3.64%.
On Thursday, the 10-year Municipal Market Data yield jumped two basis points to 1.77% while the 30-year yield increased one basis point to 2.94%. The two-year finished steady at 0.29% for the 11th consecutive session.
Treasuries were weaker Thursday. The benchmark 10-year yield jumped five basis points to 1.70% while the 30-year yield increased one basis point to 2.76%. The two-year was weaker in the morning but ended the day strong, with the yield falling one basis point to 0.28%.
In other muni bond news, banking analyst Meredith Whitney again this week spoke out about her views on the municipal bond market, prompting a reaction from many analysts, including David Kotok, chairman and chief investment officer at Cumberland Advisors. “We entirely disagree with Meredith Whitney, who persists in predicting that this world of state and local government finance will end in disaster,” he wrote in a note. “We say it won’t.”
He continued, “Let’s be clear. There are some municipal organizations in trouble. And there are cities in California and elsewhere that are seeking bankruptcy in order to gain relief from contracts. And there are states where the pressures of finance are severe and the states have not yet made the changes needed to address then. Illinois is an example of a state that we are currently avoiding.”
But, he added the key is the do homework and avoid troubled areas. “If you are not satisfied with the credit, don’t go there. We don’t.”
“We avoid cities like San Bernardino, Calif.,” he added. “We saw Harrisburg coming years before it made the headlines. They were dumb enough to build a politically motivated project, an expensive incinerator that made no economic sense. Now they have to pay the price of a bad governmental decision.”