Municipal bonds weakened Wednesday morning after credit spreads at market closing time on Tuesday showed 10-year bonds were the most expensive in almost three years.
Yields on 10-year AAA-rated GOs were 31 basis points lower than those on Treasuries maturing in the same year, according to Thomson Reuters data Tuesday afternoon, the most negative spread since July 25, 2011.
That spread narrowed Wednesday morning as municipal bond prices plunged while Treasury yields remained flat. An influx of new supply to the market may finally be giving buyers a chance to pick and choose after months of light new issuance, one trader in New York said.
"I guess it's the slightest bit of supply but there's not really that much," the New York-based trader said in an interview. "It's giving traders the chance to pause to reflect. I don't think there's really enough to impact the market but there's enough to let people pause and reflect on what supply means in this market."
Municipal issuance is projected to reach $5.28 billion this week, potentially the biggest weekly slate since early January. The scarcity of new bonds available in February allowed issuers to price at low yields and produced firming on most of the yield curve.
The state of Maryland will issue a three-tier general obligation deal to the competitive marketplace Wednesday totaling $737.4 million. New issue bonds comprise $500 million, $50 million of which are taxable bonds. The state will also issue $237.4 million of tax-exempt refunding bonds. The triple-A bonds are set to price later this morning.
The city of New York's general obligation bonds are entering their institutional sale period Wednesday following a two-day retail period. The deal has seen demand in the retail market, with yields tightening Tuesday during the second order period.
Details in President Obama's 2015 budget released Tuesday could also be worrying some investors this week, the trader said. The president's budget proposes capping the value of the tax exemption for municipal bond interest at 28%, just slightly above Rep. Dave Camp, R-Mich.'s proposal.
"You're seeing our president talking about capping municipals again, things like that are certainly the type of thing to give people pause," the trader said. "It's not any reason to sell off, but maybe take a little bit off the table. The worst that could happen with that is a long prolonged discussion that sort of paralyzes the market."
Yields on municipal bonds maturing within five years were steady, according to Municipal Market Data's AAA scale read. Bonds maturing beyond 2047 gained as much as six basis points in yield, while those in the intermediate range rose two to four basis points in yield.
With reporting from Maria Bonello and Hillary Flynn
