The municipal market is struggling to tread water Monday as light new-issue volume battles against fading Treasury yields to provide direction.
While not actually showing signs of strength as mid- to long-end Treasuries have slipped around five basis points through midday, muni yields are trying to adjust, traders said. Market gauges show weakening around the long end of the muni yield curve stronger than what traders are seeing.
"Activity is a little light right now," a trader in Illinois said. "But we're not really expecting a selloff here. The market is shrinking quite a bit. Treasuries are selling off, but the lack of supply should keep munis right about even today."
The lack of total volume has tempered somewhat expectations of a decline in yields, a trader in Florida said. Consequently, muni yields are holding better than they should, he added.
"The marketplace has some sensitivity to the calendar this week and the expectation is we'll probably have to adjust a little to consume the deals that are coming," the Florida trader said.
"There's some spotty trading at the back end of the curve, if you look at the bid side of some of the quoted paper but there's a lack of blocks at the back end of the curve to really point to any significant weakness."
Volume this week should improve markedly from the holiday week. The market expects potential volume to total $6.55 billion, up from sales of $652.2 million last week, according to Ipreo, The Bond Buyer and Thomson Reuters numbers.
That breaks down into $5.15 billion scheduled for negotiated sale and almost $1.40 billion in competitive sale.
Citi is expected to lead with issuance of $1.2 billion of New York Tobacco Settlement Financing Corporation bonds. On Monday, Citi is expected to price for retail $141 million Dekalb County, Ga., water and sewerage revenue refunding bonds, structured as serials and terms.
Demand, as measured by municipal bond mutual fund flows, continued to struggle for a 27th straight week. Outflows from muni bond funds totaled $870 million for the week of Nov. 27, Lipper FMI numbers showed. That compared with outflows of $770 million for the prior week.
Long-term muni bond funds figured among the bulk of the hemorrhaging, at $632 million, the ninth week of outflows. High-yield muni funds also suffered outflows of $191 million.
Late last week, Illinois legislators announced a proposal to reform the state's massively underfunded pension system. Trades on Illinois paper have yet to show a strong reaction, the Illinois trader said.
"I've seen a few trades go through that looked quite a bit stronger than what I expected, but it's not consistent enough to where I'd say the market is buying Illinois paper," he added.
Muni yields are weaker past the first three years of the curve by up to four basis points, according to the Municipal Market Data scale read. Maturities past 21 years have seen the biggest yield increases.
For the holiday-shortened week, the 10-year triple-A MMD yield fell one basis point to 2.65% and the 30-year yield dropped four basis points to 4.10%. The two-year was flat for the week at 0.33%.
Yields on the Municipal Market Advisors benchmark scale also ended last week firmer. The 10-year yield fell one basis point to 2.72% and the 30-year yield dropped three basis points to 4.34%. The two-year yield fell one basis point to 0.37%.
Treasuries pushed through midday weaker past the front end of the yield curve. The benchmark 10-year yield has risen six basis points to 2.81%. The 30-year has jumped four basis points to 3.86%. The two-year has held steady at 0.29%.