A rally in municipal bonds lost steam and yields jumped this week as a glut in supply hit the market.
Volume this week increased by 70% to $6.5 billion from last week's $3.82 billion supply, according to data from The Bond Buyer and Ipreo.
"[Yields are rising] because you're looking at supply building for the first time really all year," a trader in the midwest said.
Municipal yields began rising for bonds maturing in seven-to-30 years on Friday, according to Municipal Market Data's triple-A scale. On Wednesday alone yields for bonds maturing in four-to seven-years rose by three basis points, by four for bonds maturing in eight-to 11-years, and by three for bonds maturing in 12-to 30-years.
The 10-year has risen 10 basis points to 2.27%, and the 30-year by nine basis points to 3.52% on Wednesday from Thursday, according to Municipal Market Advisor's data. The two-year had held steady at 0.33%.
"Supply has increased this week, it's allowed the market to breathe a bit," a trader on the west coast said.
The trader in the midwest said that another reason the market has sold-off is because of positive economic data released last week, such as the jobless claims report that came out on Thursday which showed that for the May 24 claims fell by 27,000 to 300,000.
He said that the market will be paying close attention to the employment situation report expected to be released on Friday, especially since supply is coming back.
"If we get something that sends 10s down significantly we could get a bloodbath," he said. "With where munis are and how tight we are, if 10-year treasuries sell-off 10 basis points or 15 basis points, a AA state general obligation bond could sell-off 25 basis points or 30 basis points. If treasuries sell-off, it's always exaggerated in munis."
Tom Kozlik, municipal credit analyst at Janney Capital Markets, wrote in a report released on May 22 that the firm doesn't see issuance picking up over the long term. Janney predicts that issuance will remain between $225 billion to $275 billion in 2015 and even go as low as the $175 billion to $225 billion range in 2017.
"Higher rates will drastically reduce all issuance," Kozlik wrote in the report. "Also, the years of $300 billion+ of total issuance are likely in the past. A higher interest rate environment and our other qualitative factors will help keep new money issuance closer to pre-2000 levels."
The largest deal of the week, $900 million of Los Angeles County tax and revenue anticipation notes priced by JPMorgan on Wednesday, were instantly bought-up, market participants said.
The notes had a 0.12% yield with a 1.5% coupon maturing in 2015 with no call option. The deal received an MIG1 rating from Moody's Investor Service, SP-1+ from Standard & Poor's and F1+ from Fitch Ratings.
"The LA USD is a nice, big-focus deal for a lot of people to pay attention to," a trader in Florida said.
The deal received heavy demand for a variety of reasons, the most prominent of which was because it was a short-term note deal that doesn't expose buyers to much duration risk, according to the trader in Florida. He also said the deal is attractive to investors because it is a California credit.
"From general market perspective should be well received," he said. "There is plenty of demand for California paper."
A trader in Virginia said California paper is attractive because its spreads continue to compress to very tight levels.
The credit spread between the benchmark triple-A 10-year general obligation bond and the benchmark California 10-year bond had compressed by 18 basis points to negative 29 from June 4, 2013 to June 3, 2014, according to Municipal Market Data Interactive.
California paper is also desired because of the state's high tax, so it is particularly attractive to California residents, the Virginia trader.
"California has an exceptionally high state-tax, so [California residents] will buy this deal," he said. "California supply this year is not close to meeting its demand."
Jim Colby, chief municipal strategist at Van Eck Global, said in an interview that this year's lack of supply will ramp-up the desire for the close to $1 billion deal. Supply this year has remained low, totaling only $113.91 billion as of May 31, compared to $153.03 billion for the same period in 2013.
Piper Jaffray priced $278.2 million of Phoenix, AZ GO refunding bonds. The deal was downsized by $11.8 million, from the original $290 million issuance.
Yields ranged from 1.37% with a 2% coupon in 2019 to 3.18% with a 3% coupon in 2027. The bonds are callable at par in 2024. The deal received an Aa1 rating from Moody's and AA-plus from S&P.
JPMorgan Securities won the bid for $251.7 million of Columbus, Ohio GOs. Yields ranged from 0.25% with a 5% coupon in 2016 to 3.37% with a 4% in 2035. The bonds are callable at par in 2024 and are rated AAA by all three rating agencies.
Treasuries weakened Wednesday, with the 10-year benchmark inching up one basis point to 2.61% and 30-year yields climbing two basis points to 3.45%. The two-year note was unchanged at 0.40% from Tuesday's market close.
