Yields on tax-exempt municipal bonds were unchanged Friday, as an absence of new issue paper continued to plague the marketplace.
"The problem if you're a buyer is that there's just no supply and it has suppressed yields as well," Dan Heckman, fixed income strategist at US Bank, said in an interview. "Without a selloff in the treasury market, which seems stuck at this point, there's no supply."
There were just $1.89 billion of bond sales this past week, according to Thomson Reuters data. There are $2.75 billion of bonds scheduled for the next week. The amount won't be enough to satiate yield-hungry investors, Heckman said.
"Demand is picking up, there are inflows into muni funds, I think people are desperately searching for yield and it's challenging to find names and issuers we're excited about," Heckman said. "Some people are trying to hang out to see if we get a period with a big pick-up in supply but this week was shortened and next week is the same thing."
Light supply has kept municipal bond yields low even as treasuries soften, market participants said. In the negotiated market, Morgan Stanley held institutional pricing Thursday for $400 million of Metropolitan Transportation Authority bonds that took retail orders on Wednesday.
"Treasury yields have crept up most of the week and munis have held firm and that's primarily because of the lack of supply," Howard Mackey, vice chairman at Rice Financial, said in an interview. "You can see evidence of that in the MTA financing, which came at fairly strong levels, and they even improved yields on repricing."
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.
Yields on the retail offer for the first series of $268.4 million of bonds ranged from 0.49% with a 2% coupon in 2016 to 4.58% term bonds with a 5% coupon in 2044. Bonds maturing next year were offered in a sealed bid, and all the bonds are callable at par in 2023.
"Tax-exempts outperformed this week's US Treasury market weakness, as municipals experienced relatively lethargic trading activity (attributed partially to light staffing due to the President's Day Holiday and school vacations) and minimal issuance," John Dillon, chief municipal bond strategist at Morgan Stanley Wealth Management, said in a report Friday.
Treasury yields were lower Friday morning, with the 30-year benchmark Treasury yield falling three basis points to 3.70%, while the 10-year also slid the same amount to 2.74%. The two-year lost one basis point to 0.33%.
Bond yields according to Municipal Market Advisors were unchanged. Municipal Market Data's AAA scale showed a possible one basis point drop in yield on bonds maturing in 2025 to 2026.
"We anticipate primary market activity will accelerate in March, as January and February hold the two lowest monthly averages for issuance," Dillon wrote.
Inflows to municipal bond mutual funds reported by Lipper were $320 million in the week ended February 19, 2014.
"We note that while the muni headline flow number has been positive in five of the last six weeks, this is more a product of subsiding outflows rather than increasing inflows," Chris Mauro, head of US Municipals Strategy at RBC Capital Markets, said in a report Friday. "Total weekly inflows into municipal bond funds have only improved by about $100 million during February, while total outflows have dropped by about $440 million during this period."
