NEW YORK – Traders are gearing up for a big finish for the end of the year, as early December is expecting new supply and billions of dollars in reinvestment money flooding the market.
One trader noted that on Dec. 1, almost $30 billion of possible reinvestment money could come to munis. And that money will need to be put to work.
Analysts at Citi expect new issuance to rebound for the first several weeks in December will help create supply for demand. “We expect issuance to rebound after the Thanksgiving hiatus, but only for about two weeks,” wrote George Friedlander at Citi. “We would continue to put cash to work while the calendar remains active.”
He added, “The best time to accomplish swaps for restructuring purposes is likely to be through early December, after which bid-off spreads tend to widen out as many firms reduce activity.”
The market is expected to absorb new supply in early December fairly well, as most expect a drop-off in activity in late December and early January. “They key question as year-end approaches is as to whether there is going to be a rally into the New Year as new issue supply dries up and cash enters the market from heavy bond calls and maturities,” Citi analysts wrote. “It is likely that such a rally will occur this year.”
A trader in New York said looking forward, there are only about three weeks of real trading left before the New year. “There are three solid weeks left on the calendar and that’s it,” he said. “But with rates as low as they are, there are a bunch of refundings trying to get into the market,” which could make those early December weeks fairly busy.
A second trader in New York said December and January have “been typically our busiest months.”
Traders are also looking at muni-to-Treasury ratios as a good indication of muniland. “Heavy supply and low yields have collectively elevated five-year and 10-year ratios to levels rarely seen since the credit crisis in 2008 to 2009,” wrote JPMorgan analyst Peter DeGroot.
The five-year muni-to-Treasury ratio is currently 129.5%, approaching a high not seen since early 2009. The 10-year muni-to-Treasury ratio stands at 115%, which, except for October of this year, had not approached that range since early 2009. The 30-year muni-to-Treasury ratio is 129.3%, a level not seen since early 2009.
But while ratios make munis look extremely attractive, not all agree. “As yields approach 1%, retail gets easily discouraged,” said MMD’s Domenic Vonella. “So just looking at ratios is a frustrating game due to historically low rates.”
Activity during Thanksgiving week was, not surprisingly, slow.
“This was a relatively slow week,” said a trader in New York. “There was not much of anything coming to market.” But in the secondary market, bonds are trading “very, very cheap.”
This trader said he found healthcare names that are very cheap as well as some higher education bonds. “Our suspicion is that with new issuance, larger firms are participating in those and in order to raise cash, they are selling secondary holdings.”
On Wednesday, munis steady to firmer, according to the Municipal Market Data scale. The five-year yield fell one basis point while the six- to eight-year yields fell two basis points. Yields on the nine- to 19-year maturities fell one basis point. Yields beyond the 20-year were unchanged.
The two-year muni yield closed flat at 0.42% for its 16th consecutive trading session and the 30-year yield closed steady at 3.75%. The 10-year yield fell one basis point to 2.21%.
There was no action in the primary market Wednesday, but the secondary market was firming.
Bonds from an interdealer trade of Fulton County, Ga., water and sewer revenue 5s of 2023 yielded 2.95%, three basis points lower than where they traded Tuesday.
Bonds from an interdealer trade of New Jersey Transportation Trust Fund Auth 5s of 2042 yielded 2.88%, two basis points lower than where they traded Tuesday.
Bonds from an interdealer trade of California Health Facilities Financing Authority 5s of 2039 yielded 5.10%, two basis points lower than where they traded Monday.
A dealer sold to a customer Georgia 5s of 2023, one basis point lower than where they traded Tuesday.
Bonds from an interdealer trade of Wilson County, Tenn., 5.4s of 2032 yielded 4.67%, one basis point lower than where they traded Tuesday.
