Market Close: Quiet Friday
The municipal bond market turned in a very quiet session Friday ahead of a mild supply test this week.
The Municipal Market Data scale weakened a basis point or two for intermediate maturities but was otherwise unchanged. The 10-year yield ticked up two basis points to 2.93%, while the 30-year held in at 4.68%.
One trader in New Jersey said nobody was chasing bonds, and he got the feeling buyers were “just kind of regrouping” following the 10-basis-point rally earlier in the week.
Both the factors that bolstered municipals last week — a flight from risk in broader financial markets and the continuing supply drought — might be out of play this week.
The flight to safety partially unwound on Thursday and Friday, with Treasury yields picking back up 10 basis points and the S&P 500 Index rallying 1.8%. The bid for municipals based on risk-aversion appears to have run its course.
The Street will get something of a mini-test of its ability to absorb new supply next week, with issuers scheduled to sell $4.4 billion of debt. New York State looms with an $830 million deal and Massachusetts plans a $438.5 million sale.
If it’s not a full-blown test, we’ll call it a quiz. While not a heavy slate by historical standards, $4.4 billion is well above the 2011 trend.
The trader in New Jersey said one week with $4.4 billion of issuance is not going to change the supply-demand balance. Several weeks might.
In the meantime, municipals continue to benefit from scarcity.
“There’s no pressure; there’s no reason for us to have to sell,” this trader said. “There’s still only so much around in Muni Land. ... If we get another couple of weeks with this much coming, then we will have some concerns.”
John Compton, who heads underwriting at Crews & Associates, said bankers are having little trouble placing bonds now, amid the light supply. He’s not sure bonds would be absorbed so readily with a heavier supply. It’s not that buyers would be non-existent; it’s just that municipalities might have to pay more to attract investors.
“It won’t be harder to find buyers; it just might take more yield,” Compton said. “A buyer can always be found at a price.”
The yield curve might have to steepen with a heftier supply of new bonds, Compton said.