Municipal bond investors, particularly institutions, sat out Monday’s session, giving the market a sluggish tone.
While muni yields stagnated, Treasury yields found their footing by midday.
The retail order periods for some of the week’s issuance started to seep in, but the secondary saw little activity, traders said. Still, muni underperformance held multiple interpretations, a trader in Los Angeles said.
“The market is waiting for the deals to come this week,” he said. “There’s some concern that, if Treasuries continue to do well, we will underperform them because of the supply coming up.”
But the move in the Treasury market is helping tax-exempts because it’s bringing muni ratios to Treasuries back down to attractive levels, he added, allowing the market to adopt a more positive view of the impact the uptick in supply could have.
“The overriding factor is that we need paper,” he said, “and as long as we continue to have net inflows to mutual funds, that’s going to continue for a while.”
This week, $7.80 billion of bonds is expected to reach the primary. This almost doubles last week’s revised $4.20 billion.
On Monday, Morgan Stanley priced for retail the second largest deal on the calendar: $839.1 million of New York City general obligation debt in six series.
The city expects to sell all of the bonds to retail over the two-day retail order period. Institutions can mop up anything that remains by Wednesday.
The bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings. Yields for the first series, $500 million, range from 0.61% with a 5.00% coupon in 2016 to 3.561% with a 3.50% coupon in 2038.
Credits maturing in 2015 were offered in a sealed bid; those maturing in 2037 were not available for retail. The bonds are callable at par in 2023.
Yields in a second series, $222.6 million, range from 0.45% with a 2.00% coupon in 2015 to 3.391% with a 3.375% coupon in 2034. Credits maturing in 2014 were offered in a sealed bid. The bonds are callable at par in 2023.
Credits in four series that total $116.4 million were not offered to retail.
The market, leaden and lackluster, shuffled into the afternoon. Absent supply, the secondary showed little pressure throughout the session, which discouraged institutional buyers from participating, a trader in Chicago said.
“Though rates haven’t backed up in any dramatic way, certainly they feel more comfortable buying the size they need in the primary market than being forced to lift yields in the secondary,” he said of institutional participants.
Accordingly, the market ended Monday mostly flat, yet slightly firmer in the intermediate part of the curve. Yields of credits maturing between eight to 10 years shed one basis point, according to the Municipal Market Data triple-A GO scale.
The 10-year triple-A skipped down one basis point to 1.89% while the 30-year ended the day at 2.94% for the third straight session. The two-year closed at 0.31% for the fifth session.
Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale ended flat to one basis point lower. The 10-year yield held at 1.90% for the fourth session. The 30-year yield closed at 3.02% for the third session. The two-year slipped one basis point to 0.34%.
Treasuries closed out Monday noticeably stronger across the curve. The benchmark 10-year yield and the 30-year yield dropped eight basis points to 1.89% and 3.08%, respectively. The two-year yield slipped two basis points to 0.27%.