Municipal bonds weakened slightly Thursday, following Treasuries, with low issuance continuing to plague the market and a holiday-shortened week approaching.
"Munis have softened," a trader based in Chicago said. "There's been talk about a 30-day supply pick up, but it doesn't look like it's happened. It could be that people are taking a deep breath ahead of a holiday weekend."
Muni yields on the intermediate and long part of the curve climbed as much as one basis point. The short-end of the curve was steady, according to the Municipal Market Data's triple-A scale.
Light volume has been an ongoing trend in the municipal market this year; one that doesn't seem to be letting up any time soon.
Janney predicts issuance will decrease in 2014 compared to 2013 and will continue to drop further in the next one to three years, though demand for municipal bonds is strong, making the current environment ideal for issuers.
"There is an appetite out there for municipal bonds," a trader in New York said. "Rates are favorable to bring issues to market."
New money issuance is significantly down so far this year, and would project at $133 billion for the year, according to the Janney Municipal Bond Market Monthly. Though issuance has been off since 2011, volume hasn't hit these levels since 1997.
"It's typical [to see less issuance] when rates come down as they have, 100-plus basis points," the Chicago trader said. "Refunding deals are coming to market because economics make sense. There will be more refunding if this environment continues."
Some of the factors contributing to this steady decline of supply include: "higher interest rates, use of direct bank loans, austerity measures, less flexibility in spending, political and voter attitudes, and the lack of broad public policy supporting infrastructure spending," according to the Janney.
"There are a lot of factors that are contributing to this low supply environment and will continue in the short term," the Chicago trader said. "In regard to high yield, bank participation, direct loans and states not borrowing enough are a part of it."
The bulk of issuance came earlier in the week leaving Thursday's market supply light with only one negotiated deal over $100 million expected to price.
"Volume is surely low," the West Coast trader said. "Most of the deals came earlier in the week. It's somewhat of a holiday-shortened week so there's nothing that's going to add to the balance of the week."
Stifel Nicolaus was expected to bring $230.9 million of Cuyahoga County, Ohio, certificates of participation to the market Thursday. The deal received an Aa3 rating from Moody's Investors Service and an AA-minus from Standard & Poor's.
There are no deals over $100 million scheduled to enter the competitive market Thursday.
"Treasuries are a bit off causing the market to weaken," a trader on the West Coast said. "It's a combination of a rally that went too far too fast and sticker shock. The levels are getting too high and buyers are starting to balk a bit. Issues are struggling to get placed. The market is starting to consolidate."
Treasuries weakened Thursday afternoon, with 30-year yield and the two-year note slipping one basis point each to 3.43% and 0.36%, respectively. The 10-year benchmark rose two basis points to 2.56%.
Secondary market trading showed weakening, according to data provider Markit. New York Metropolitan Transportation Authority revenue bonds with a 5% coupon maturing in 2043 climbed one basis point in yield to 3.99%, and the New Jersey Transportation Trust Fund Authority bonds with a 5% coupon maturing in 2042 jumped one basis point in yield to 4.06%.
Massachusetts consolidated GOs with a 5% coupon maturing in 2041 inched up one basis point to 3.25%, and California various purpose GOs with a 5% coupon maturing in 2043 rose one basis point to 3.75%.
