Municipal bonds remained insulated from weakening Treasury prices Thursday as light supply keeps yields competitive in the secondary marketplace.
Refunding volume so far this year is $7.77 billion, down 68% from this time last year, when refundings totaled $24.3 billion. New-money volume has increased 30% to $22.6 billion from $17.3 billion. Volume overall is 35% lower than at this point last year, according to Thomson Reuters data.
Heavy cash reserves and a lack of new supply have helped keep yields low on new issuance so far this year, market participants said. Fewer bonds in the secondary means muni yields can't climb as high as Treasuries in some cases, traders said.
"Demand, which is greater than it was almost all last year, is keeping yields pretty tight and I think that's what we're seeing here even as there are some cuts in reaction to Treasuries being off," one financial advisor on the west coast said. "When you have as little in supply as we've had this year, it's going to drive secondary prices and a lot more people scraping around for a lot less paper that's out there."
Slipping municipal bonds, which gained as much as two to three basis points in yield Thursday, according to Municipal Market Data, may be reflecting the market's preparation for a slate of large new issue deals next week, traders said. A softer market would mean more attractive yields for buyers.
"I think we're focused on the larger calendar next week, setting up for the deals," the advisor said. "There's a lot of money out there looking for new issues, I don't think it's going to be that much of a stretch to place all of this."
Treasury yields jumped Thursday, with the 30-year climbing five basis points to 3.68% and the 10-year benchmark up four basis points to 2.74%. Two-year notes gained two basis points to 0.36%.
"Spreads have tightened across the board over the last two months," one Chicago-based trader said in an interview. "The Treasury market with tapering has become less volatile, and credit products are more comfortable in the interest rate environment we are in. When you combine that with lower volume, yields become tighter."
