The supply and demand imbalance in the municipal market continues to push munis stronger. Despite traders noting that activity and volume was weaker Tuesday after a three-day weekend, yields continued to hit new record lows.
Munis were much firmer Tuesday, according to the Municipal Market Data scale, even after setting new record low yields every day last week. Yields inside the three-year were unchanged while the four-year and five-year yields fell two basis points. The six-year to eight-year yields were unchanged while yields outside the nine-year fell between two and four basis points.
The two-year closed steady at 0.35% for its third consecutive trading session. The 10-year yield closed down two basis points to 1.69%, beating the previous record of 1.71% as recorded by MMD Friday. The 30-year dropped three basis points to 3.17%, beating the previous record of 3.20% registered on Friday.
Munis followed Treasuries higher. The benchmark 10-year yield and the 30-year yield fell two basis points each to 1.85% and 2.89%, respectively. The two-year yield finished steady at 0.23%.
Even though yields were lower, traders said the three-day weekend put a damper on trading activity.
“The market is a little tired and it’s not moving much,” said a trader in New Jersey. “It’s stale and it was a long weekend so it feels like a Monday but it’s worse because it’s a three-day hangover.”
He added the markets are firmer Tuesday, but there is not a lot of activity or volume trading.
Other traders agreed activity was muted compared to the rally last week. “It’s neutral to a better bid,” said a trader in New York. The market “feels like a breather.”
The primary market was quiet Tuesday, but trades reported by the Municipal Securities Rulemaking Board in the secondary market showed a big rally in just a single trading session.
Bonds from an interdealer trade of Frisco, Texas, Independent School District 5s of 2031 yielded 2.84%, 20 basis points lower than where they traded Friday. Bonds from another interdealer trade of Sharyland, Texas, Independent School District 5s of 2038 yielded 3.33%, 11 basis points lower than where they traded Friday.
A dealer sold to a customer Florida’s JEA 4s of 2033 at 3.92%, 10 basis points lower than where they traded Friday. A dealer bought from a customer Illinois Metropolitan Pier and Exposition Authority 5s of 2050 at 4.63%, 11 basis points lower than where they traded Friday.
Ratios finished lower for last week. The 10-year muni-to-Treasury ratio closed at 91.9%, down from 93.4% at the beginning of last week. The 30-year ratio finished at 110%, down from 114.2%. The five-year was up slightly at 102.5%.
Looking ahead to Wednesday, Citi is expected to price $463 million of Massachusetts new and refunding general obligation SIFMA index bonds, a surprise deal added to the calendar Tuesday.
On the competitive calendar Wednesday, the Port Authority of New York and New Jersey will issue $400 million of revenue bonds, rated Aa2 by Moody’s Investor’s Service and AA-minus by Standard & Poor’s.
Fairfax County, Va., is expected to issue $220 million of general obligation bonds, rated triple-A by Moody’s and Standard & Poor’s.
Tax-exempt yields continue to trend lower because of the supply and demand relationship. “A comparison of early 2011 and early 2012 reveals that signs of the supply-demand imbalance that roiled municipal bonds in late 2010 through early 2011 is simply not present in the market today,” wrote Anthony Valeri, market strategist at LPL Financial.
One of the reasons for the imbalance is lower issuance. “In early January 2011, the new issue calendar ramped up quickly and within days peaked at over $10 billion,” he wrote. In comparison, issuance this week is expected to hit only $3.45 billion, down from last week’s $4.19 billion.
Valeri also noted that forced selling a year ago drove munis weaker. “Bonds up for sale have also increased but remain well below year-ago levels. At $374 million, bonds for sale are roughly half the $713 million for sale after the first week of 2011.”
Bonds available for sale in the secondary market are also much lower now than in 2011. Valeri said that a market already saturated with bonds for sale means that even a slight increase in new issuance can push prices lower. At the end of the first week this year, secondary market supply stood at $9.6 billion, $4 billion less than what it was in 2011.
Supply isn’t expected to increase anytime soon, according to BMO Capital Markets. “Muni issuance took its first major hit in 2011, as governments initiated fewer capital projects and reduced spending for general purposes,” wrote Justin Hoogendoorn, managing director at BMO. “U.S. states are likely to continue cutting spending in 2012 as depleted reserves, reduced federal transfers, pension funding drags, and economic prospects persistently crimp new capital spending projects.”
However, he added low rates should drive refundings to $100 billion or higher, pushing total expected issuance in 2012 to an estimated $343 billion.