Market Close: Turbulent Quarter Ending; Munis Weakening
Municipal debt continued its steady fade Thursday as lingering concerns about the market’s capacity to soak up whatever supply might be coming later this year kept people from bidding on bonds.
Evidence of weakness is everywhere. Municipal Market Data has pushed the yield on the 10-year triple-A municipal scale up 29 basis points in the past 11 trading sessions, including four basis points on Thursday.
The Bond Buyer’s 20-Bond GO Index of 20-year general obligation yields rose nine basis points to 5% this week, while the 10-year Treasury yield rose only four basis points.
Even in the midst of a severe supply drought, new deals coming to market are not finding a receptive audience. Earlier this week, the Sunshine State Governmental Financing Commission floated a $247.6 million revenue bond whose 10-year maturity priced at a yield of almost 5%, more than 70 basis points higher than the single-A scale at that maturity. An insured piece of the bond maturing in 10 years priced to yield about 70 basis points more than MMD’s insured scale at that maturity.
“Right now it’s a fight out there,” said a trader in New York.
The latest MMD bull/bear survey found that 57% of traders are bearish, the most pessimistic outlook since Dec. 10 – a time when yields were in the process of skyrocketing.
One dynamic that might be draining some liquidity from the market lately is dealer behavior at the end of a turbulent quarter. During a period when yields are drifting up every day, dealers are hesitant to buy bonds and then get stuck with them just as the quarter ends.
“People don’t want to own a whole lot, so they just sit on the sidelines,” the trader said. “People are not stocking inventory.”
As usual, the saving grace is an utter lack of issuance. The first quarter was the lightest quarterly issuance since 2000, according to Thomson Reuters. People are talking more and more about looming supply, but it hasn’t shown up yet. The Bond Buyer’s 30-day visible supply shows just $6.3 billion of municipal bonds for sale over the next month.
“We’re hearing more talk about it, but we’re not seeing it,” said a trader in California. “It’s a hovering concern, but the reality out in the marketplace is we’re not really seeing that buildup yet.”
Nonetheless, this trader said, if people think supply is coming and behave accordingly, they may be hesitant to stock bonds ahead of new bonds they believe are coming.