With the 30-day visible supply now over $11 billion, traders in the municipal bond market say supply headwinds are pushing munis lower.
Supply fears, plus another rally in the Dow Jones Industrial Average pushing stocks to record highs, are pushing bond prices lower.
To start off the majority of supply this week is from triple-A rated Maryland which is expected to auction $692.6 million of general obligation bonds in two pricings - $500 million and $192.6 million.
"Here we go with Maryland and that will set the tone with high-grade stuff," a Chicago trader said. "It's a little weaker today. It's certainly not unchanged. If you need to create liquidity, you're getting a lower number than yesterday."
While the market is a bit weaker, this trader added he is seeing success with specialty states and unique credits. "Those continue to be pulled off my inventory."
Beyond the Maryland GO deal Wednesday, supply is expected to pick up in the next few months, adding further pressure. "It looks like we are on a trajectory where supply is coming back to the market," this trader added. "There is a growing New York calendar and a growing California calendar. And if you look at where bonds have traded in terms of gross volume, those are regularly the two largest states. So there are a couple of clouds in the sky now and bearish bond sentiment for munis."
He continued that when 30-day visible supply is over $10 billion, market participants get "queasy" about the market. Still, with employment numbers expected to be released Friday morning, any big bearish bets will be put on hold. "If there is money coming in to bond funds and you get a bad economic number Friday, then supply is OK and we move up. But the forces at work create a volatility that is much stronger than they have been in the past."
In other deals expected Wednesday, Raymond James plans to price $400.5 million of Virginia Housing Development Authority homeownership mortgage bonds, rated Aa1 by Moody's Investors Service and AA-plus by Standard & Poor's.
Citi is expected to price for institutions $400 million of Connecticut general obligation bonds, rated Aa3 by Moody's and AA by Standard & Poor's and Fitch Ratings. The bonds are also rated AA by Kroll Bond Ratings.
In retail pricing Tuesday of $200 million of GOs, yields ranged from 1.07% with a 2% coupon in 2019 to 3.30% priced at par and 3.07% with a 4% coupon in a split 2033 maturity. The bonds are callable at par in 2023.
Overall, municipal bond market scales ended weaker Tuesday for the second straight session.
Yields on the Municipal Market Data triple-A GO scale ended as much as four basis points higher. The 10-year yield jumped four basis points to 1.83% while the 30-year yield increased three basis points to 2.94%. The two-year closed at 0.31% for the 11th straight session.
Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale closed as much as three basis points higher. The 10-year and the 30-year yield jumped three basis points each to 1.85% and 3.01%, respectively. The two-year was steady at 0.33% for the sixth session.
Treasuries were weaker for the third consecutive session. The benchmark 10-year yield jumped three basis points to 1.93% while the 30-year yield rose four basis points to 3.14%. The two-year was steady at 0.25%.