NEW YORK — Lower-than-expected demand for this week’s new supply is forcing difficult decisions from muni bond dealers who are growing anxious about their inventory levels and the volatility of yields.
Sellers are still selling to those who like the direction of yields. But others are staring at product that’s floating around the secondary market blinking before the uncertainty raging through the market.
“People aren’t putting out much for the bid; although, people do have things,” a trader in New York said. “There are a lot of problems that have to be addressed. So, they have to address them, whether they want to sell it or whether they want to cut it to realistic levels, or whether they want to just hang on.”
The scale is going to be cut again Friday, the trader added. And at some point, management will demand that participants vacate their positions.
A trader in North Carolina saw the secondary market a little differently, though. The 10-year space has seen something of a recovery in Friday’s session.
“Finally, there’s some support to the market, given the dramatic back-up in rates we’ve seen this week,” he said. “Buyers are stepping into the marketplace in the 10-year space. People are looking to put money to work today. Compared to the rest of the week, it’s an active day. And there’s a little bit of stability.”
Tax-exempt yields continue to weaken crossing noon Friday, according to the Municipal Market Data scale. The yield curve continues its flattening.
Yields are one to four basis points weaker out to nine years. Those for the 10- to 12-year range are flat to two basis points higher. Beyond 12 years they are one to three basis points higher.
The 10-year muni yield leapt 11 basis points Thursday to 2.55%, after surging 15 basis points Wednesday. It has risen 58 basis points from its record-low yield of 1.97% on Sept. 23.
The 30-year yield jumped eight basis points in the day’s session to 3.70%. It had increased the same amount in the previous day’s session. The two-year yield rose two basis points to 0.41%.
Treasury yields are rising, as well. The benchmark 10-year Treasury yield has climbed 11 basis points crossing noon to 2.11%.
The 30-year yield has been moving roughly in line with the 10-year, of late. It has risen 12 basis points to 3.08%.
The two-year yield so far has inched up one basis point to 0.29%.
The industry anticipates a small drop in volume over next week. Roughly $6.93 billion is expected for the coming week, after $8.23 billion this past week.
The week ending Oct. 5 saw $113 million in outflows from muni bond funds that report their flows weekly, according to Lipper FMI. In the previous week, ending Sept. 28, there were net inflows of almost $600 million.
High-yield muni funds also saw their first outflows in five weeks. Funds that report weekly saw outflows of $70 million, Lipper said. The previous week, high-yield funds reported inflows of $37 million.
In the shadow of the outflows, a closer look at bond funds shows that this past week fell into line with recent trends, wrote RBC Capital Markets’ Chris Mauro in a recent research note. Muni bond fund investors are still focusing on the short end.
And interest in high-yield muni funds, which had been strong all last month, seems to be wilting. “Notably, 17 of the top 20 funds with the largest net inflows were again short, ultra-short or intermediate funds,” Mauro wrote. “These funds accounted for almost 45% of all municipal bond net inflows.”
