With most municipal market participants already in holiday mode, municipal bonds weakened again through midday on Wednesday, as traders said yields were as many as five basis points higher in some maturities.
Primary Market
Volume for the week ending Dec. 2 is forecast by Ipreo to rise to a more normal level of $9.1 billion, from $460 million in the Thanksgiving week, according to revised data from Thomson Reuters. The calendar is comprised of $6.72 billion of negotiated deals and $2.38 billion of competitive sales.
This will be the first significant week of issuance since yields vaulted after the election, and Dan Heckman, senior fixed income strategist U.S. Bank Wealth Management, said that the market will 'probably struggle' with the additional supply.
"So many deals are being held off, but I also think issuers are using other methods of financing, like direct bank loans," he said. "The market needs a slowdown in supply and a rally from the Treasury market in order for things to turn around."
Heckman also said issuers will have to be careful about entering the market and getting deals done, as the market from both a technical and fundamental standpoints is not in great shape.
"The market has already priced in the upcoming potential rate hike, but there is a strong sentiment of people thinking that rates are still historically low and I wouldn't blame them for wanting to get it done before mid-December," he said. "But they also have to realize that they will have to price it very cheap, as buyers will be hesitant, understandably so."
Morgan Stanley is expected to price the largest deal on the calendar – the city of Chicago, Chicago O'Hare International Airport's $1.08 billion of general senior lien revenue bonds, which will consist of both alternative minimum tax and non-AMT portions, on Wednesday. The deal is rated A by S&P Global Ratings.
The second billion dollar deal on the schedule will also be priced on Wednesday, as Barclays is set to run the books on the New Jersey Economic Development Authority's $1.07 billion of school facilities construction and refunding bonds.
Barclays will also be pricing the District of Columbia's $577 million of general obligation and GO refunding bonds on Wednesday. The deal is rated AA by S&P and Fitch Ratings.
The Commonwealth of Massachusetts plans to sell three competitive sales on Wednesday totaling $600 million. The GO Consolidated Loan of 2016 bonds will be separated into one sale of $300 million and two sales of $150 million each. All three deals are rated Aa1 by Moody's Investors Service and AA-plus by S&P and Fitch.
Heckman added that he is not sure that tax rates coming down to 39% through 33% will happen right away, as he thinks it's not as high of a priority as originally stated.
"The thought process of tax rates coming down, I think it is tougher to get done but I do think corporate tax reforms are more likely," said Heckman. "Given the dramatic move in the market, I think high investment grade paper should start doing better. If rates start going up, people will get rewarded for going up the credit scale latter and investment grade will outperform high yield on the muni side, although it will be the opposite for corporates."
Secondary Market
Top-shelf municipal bonds continued to weaken on Wednesday.
The yield on the 10-year benchmark muni general obligation rose three to five basis points from 2.33% on Tuesday, while the yield on the 30-year increased one to three two basis points from 3.08%, according to a read of Municipal Market Data's triple-A scale.
U.S. Treasuries were also trading weaker on Wednesday. The yield on the two-year rose to 1.13% from 1.09% on Tuesday, the 10-year Treasury gained to 2.37% from 2.32%, while the yield on the 30-year Treasury bond increased to 3.05% from 3.01%.
