Investors are saying there is value in shorter-term bonds as the curve begins to flatten.
"The front of the yield curve, newly adjusted for revised Fed assumptions, is showing value on a mean reversion basis," Municipal Market Advisors said in a report released Monday. "We assume that recent losses will not be completely durable, implying upside at some point, but only once positive momentum has become more clear."
Yields on the long-end began rising on Friday when 11- to 20-year bonds jumped up to two basis points, and continued when seven- to 30-year bond rose two basis points on Monday. The price decrease follows a sell-off on the short end from March 19 to March 26 during which short and intermediate yields hiked as the long end remained stable.
From March 19 to March 25, 30-year yields fell one basis point to 4.02%, while the 10-year rose seven basis points to 2.59% and the five-year jumped 21 to 1.34%, according to data provided by MMA.
"Better market dynamics drove intermediate and long bond yields lower last week, although the front end continues to show softness as accounts contemplated the risk of earlier Fed action on rates," MMA said in the report. "In our view, this is likely a temporary uncertainty that will bleed off in coming weeks."
Tuesday afternoon the front end of the curve held steady for maturities up to seven years, with three- to five-year maturities falling as much as one basis point. Yields on the long end continued to rise, one basis point for eight-years and up to two for up to 20-year maturities.
Bonds with defensive 5% or higher coupons with short maturities are still desirable, Morgan Stanley said in a report released Friday.
Participants said the muni market's performance in the first quarter of the year was encouraging. S&P's National AMT-Free Municipal Bond Index reported a market gain of 3.3% from January through March 31, the largest gain the market has had in the first quarter since 2009, when bonds returned 3.6%.
Market participants said that low issuance has driven up investor demand this quarter.
"There has been a substantial rally towards the end of the quarter," a trader in New York said.
New issuance in March dropped to $27.63 billion from $32.75 billion last year, according to data provided by Thomson Reuters. There were $62.48 billion in bond sales this past quarter, compared to $84.43 billion in 2013.
"A lot of issuance was squeezed out at the end of last year, this year kind of stole some of the supply," Robert Donahue, managing director at Municipal Market Advisors, said in an interview. "We are having a slow start."
This week's total potential volume is slated at $4.19 billion, down from $4.78 billion issuance the prior week.
"We don't have a huge calendar in front of us," a trader based in New York said.
There are no deals over $100 million scheduled for issuance in competitive market on Tuesday.
On Wednesday, $120 million Lincoln Public School District, Neb., general obligation bonds will be auctioned in the competitive market.
In the negotiated market, Wells Fargo Securities Tuesday brought $258.3 million of revenue financing system bonds for the University of Texas. Yields ranged from 0.42% with a 2% coupon in 2015 to 3.80% with a 5% coupon in 2044.
The bonds, which mature serially from 2015 to 2036, with terms in 2042 and 2044, are callable at par in 2024 and rated Aaa by Moody's Investors Service and AAA by both Standard and Poor's and Fitch Ratings.
The San Jose-Evergreen Community College District of Santa Clara, Calif., will issue $250.7 million of general obligation bonds and refunding bonds. RBC Capital Markets will bring the bonds to market with a Aa1 rating from Moody's and a AA rating from S&P.
Goldman Sachs will price for retail $261.1 million of dedicated unlimited tax ad valorem property tax GO bonds and refunding bonds for San Diego School District. The retail order period was scheduled to begin on Monday. The bonds are rated Aa3 by Moody's and AA by S&P.
The Louisiana Local Government Environmental Facilities and Community Development Authority issued $209.8 million of subordinate lien revenue bonds for the East Baton Rouge Sewerage Commission projects. Yields ranged from 3.21% with a 5% coupon in 2025 to 4.34% with a 5% coupon in 2044.
The bonds are callable at par. The deal is rated A1 by Moody's, A-plus by S&P and AA-minus by Fitch
Treasury yields were steady Tuesday afternoon, as the 30-year and the 10-year benchmark were unchanged at 3.60% and 2.76%, respectively. Two-year notes held steady at 0.44%.
