The municipal bond market on Tuesday switched to holiday mode ahead of Wednesday's early market close and the full close on Christmas Day. Minimal activity is expected on Friday, too.
Prices of high-quality municipal bonds were lower, according to Municipal Market Data.
Muni Bond Funds Remain Popular
Investors are continuing to pour cash into municipal bond funds, according to data from Lipper.
Municipal bond funds have been generally popular in 2014 as more investment went into the funds than was taken out in 44 out of 51 weeks.
After the strong year, Chris Mauro, head of municipals strategy at RBC, feels there is no reason to believe the trend of inflows won't continue in the New Year, even though it's always hard to take December flow numbers and extrapolate it into January and beyond.
"We will have to wait a few weeks and see what the trends look like. However, with the levels of coupon payments over the next few months, particularly in January it looks like it will be much of the same in 2015," Mauro said. "Not all of it will be reinvested, but given the history, it looks like a good amount of it will be."
In the latest Lipper report, muni bond funds which report weekly posted $611.055 million of inflows in the week ended Dec. 17 after experiencing inflows of $695.479 million in the previous week.
The four-week moving average remained positive at $510.797 million in the latest week. A moving average is an analytical tool used to smooth out price moves by filtering out fluctuations.
Long-term muni bond funds saw inflows of $464.214 million in the latest week, compared to inflows of $407.260 million in the previous week.
Meanwhile, high-yield muni funds recorded inflows of $298.631 million after seeing inflows of $286.277 million in the previous week. Exchange-traded funds had inflows of $91.562 million, after inflows of $89.761 million in the prior week.
Natalie Cohen, a Managing Director at Wells Fargo Securities, also thinks that trends from the fourth quarter of this year will carry over into 2015, but said this might only last until the Federal Reserve moves on rates.
"We will see cash go into people's portfolios because of redemptions and they will want to spend their cash. There will be more money looking to be put to work and less supply," she said, adding however, "There could be a shift in thinking around springtime if the Federal Reserve takes action and increases interest rates."
Primary Market
Only four deals were on Tuesday's competitive calendar totaling less than $10 million. These included one bond sale and three note sales, two each under $1 million. No negotiated deals came to market.
No other bond issues are currently scheduled for negotiated or competitive sale until after the start of the new year.
"Unless there are unexpected headline developments in the next few days, look for little else to happen through New Years," Municipal Market Advisors managing director Matt Fabian writes in a research note.
Looking ahead to January, the Dormitory Authority of the State of New York has scheduled a $1 billion bond sale in a negotiated transaction. DASNY plans to offer $1 billion of general purpose state personal income tax revenue bonds. A group including Barclays, Citigroup and Rice Financial Products is slated to price the bonds.
"The upcoming PIT bond sale is a refunding for savings, as assumed in the state's current financial plan," a DASNY spokesman told The Bond Buyer.
In trading on Tuesday, prices on DASNY's Series 2013A state sales tax revenue bond 5s of 2043 weakened, with the yield rising to 2.92% from 2.91%, according to an evaluation by Markit of actively traded bonds.
Data from the Municipal Securities Rulemaking Board's EMMA website on Tuesday show that DASNY's Series F state personal income tax revenue bond 3 1/4s of 2031 traded nine times on volume of $290,000 with a high/low price of 101/7/98.85 and a high/low yield of 3.343%/3.053%.
Secondary Market
High-grade municipal bond prices were lower on Tuesday. The yield on the benchmark 10-year general obligation rose two basis points to 2.09% from to 2.07% on Monday, while the yield on 30-year GOs was up two basis points to 2.94% from 2.92% on Monday, according to the final read of Municipal Market Data's triple-A scale.
Treasury prices were lower, with the two-year note yield rising to 0.73% from 0.65% on Monday. The 10-year yield increased to 2.25% from 2.16% while the 30-year rose to 2.83%, from 2.75% on Monday.
The 10-year muni-to-Treasury ratio was calculated at 91.9% on Tuesday versus 95.7% on Monday; the 30-year muni to Treasury ratio was at 102.7%, compared with 106.1% on Monday.
"Heavier than anticipated year-end new issue volume contributed to elevated municipal to Treasury ratios in recent weeks," Alan Schankel, managing director at Janney Capital Markets, writes in a research report. "A strong burst of new issuance in early December may be responsible for the higher municipal to Treasury ratios we've experienced in recent weeks."
But the over the longer term, Janney sees ratios as heading down.
"We projected a trend towards lower M/T ratios, a view we continue to support, the recent uptick notwithstanding," Schankel says. "Currently elevated M/T ratios offer an opportune entry point for municipal bond investors with uninvested cash. We believe that as ratios trend back to lower levels in coming months, tax free municipal bonds will outperform other fixed income asset classes."
MSRB Reports Previous Session's Activity
The Municipal Securities Rulemaking Board reported 30,564 trades on Monday on volume of $5.322 billion.
Most active on Monday, based on the number of trades, were the Bolingbrook, Ill., refunding bonds of 12/29/14 Series A 4s of 2038, which traded 326 times with an average price of 99.686 and an average yield of 4.018%. Second most active were the New Jersey Transportation Trust Fund Authority transportation program bonds, Series AA 4 1/4s of 2044, which traded 121 times with an average price of 99.652 and an average yield of 4.253%.
