Fears of escalating tension between Russia and Ukraine pushed U.S. Treasury yields lower Monday, aiding a rally in munis as buyers looked for safe investments.
With new-issue supply coming off the smallest February offering since 2000 and signs that the U.S. economic recovery remains sluggish, market participants said investor flight to Treasuries on Monday added strength to the muni market.
"With this tension with Russia, it always opens people's eyes up to what's going on in the world," one Chicago-based trader said in an interview. "People are in a limbo phase: they're not going to abandon equity products entirely, but the smarter money is realizing that there is still plenty of value in fixed income."
Following a violent rebellion in Ukraine that resulted in the exit of the country's president, the Russian government Monday continued military invasion in the Ukraine's Crimea region, spiking global oil prices and sending U.S. stocks tumbling.
"If the geopolitical situation continues to deteriorate near term, munis are going to be supportive in the near term as Treasury rates move lower," Mikhail Foux, a strategist at Citi, said in an interview. "Over the last several days the move in Treasuries has tightened munis."
Yield on the benchmark 10-year Treasury fell six basis points Monday, contributing to a 14-basis-point rally since Feb. 20. Muni bonds with the same maturity also strengthened Monday, falling about four basis points, according to Municipal Market Advisors and Municipal Market Data.
Treasury yields on the 10-year have fallen 41 basis points this year, according to MMD. The move, along with low municipal supply and a faltering economy, has supported low bond prices, Foux said. Perceptions of turmoil overseas probably kept muni prices down Monday, he said.
"The big question is whether the issues will be long-lived or short-lived," Foux said. There have been similar situations historically that ended quickly."
Market observers agreed that unrest between the two nations drove investors to Treasury markets and that the impact on municipal bonds may not be realized until further down the road.
"Clearly, it's driving some people to move to safer assets," Brian Rehling, an economist at Wells Fargo Advisors, said in an interview. "We're seeing yields dip a little; people are seeking out some safer assets. I don't believe it's going to be a long term aspect of the market."
The turmoil in Eastern Europe fueled tightening of the Treasury market last week, according to Kevin Horan, director of fixed income indices at Standard & Poor's Dow Jones Indices.
At the heart of the municipal rally is continuing low supply levels, Horan and other market participants said.
"Though in the past municipal bonds have been a safe haven, it is early to say but the demand for munis can be more attributed to lower supply of new issues and relatively attractive yields for investors," Horan said in an email.
Municipal bond yields firmed Monday morning as buyers prepared for the first week of more than $5 billion of potential issuance since January.
The scarcity of new bonds available in February allowed issuers to price at low yields and caused firming on most of the curve. The coming week, with $5.28 billion in estimated volume, presents an opportunity for eager buyers.
Trading activity in the municipal marketplace spiked Monday afternoon as rallying Treasuries and new retail bonds brought investors off the sidelines.
"The yield curve is coming in a bit," one Chicago-based trader said in an interview. "There's just a ton of cash on the sidelines and there's been no supply."
Municipal bond trading measured by the MSRB was up as much as 21% above Bloomberg's Monday average in the afternoon, as investors focused on California, New York and Texas bonds. Puerto Rico bond trading was the only top-12 most actively traded bond that saw a decline in activity today, according to data from Bloomberg.
Yields on all bonds strengthened through the afternoon. Bonds maturing between three and seven years out saw a bigger jump in activity than any other maturity range.
"The new deals are going to get eaten up, it's going to be a gobble," the trader in Chicago said. "We're absolutely going to remain firm" as the new deals price, he said.
There are $3.90 million of negotiated bonds slated for this week, and $1.37 billion in competitive deals, according to data from Ipreo and The Bond Buyer. Last week's total bond sales came to just $2.49 billion.
The second-biggest deal of the week, $700 million of New York City general obligation bonds led by Citigroup Global Markets, held retail pricing on Monday.
Yields on the GOs ranged from 0.59% with a 3% coupon maturing in 2017 to 4.3% with a 4.25% coupon maturing in 2039. Bonds maturing from 2024 to 2033, as well as those in 2013 and from 2035 to 2038, were not offered for retail.
Municipal bond yields as a whole were down as much as five basis points on the long end Monday, according to Municipal Market Data. Bonds maturing from 2020 to 2026 were down as much as four basis points.
