Muni primary slows to a crawl as traders go into pre-holiday mode

Municipal bond traders are putting the finishing touches on the week with no major bond sales set to price in the primary on Thursday and muni yields are expected to remain in a tight range ahead of the long holiday weekend.

Friday’s trading will close early ahead of the Memorial Day holiday on Monday.

Secondary market
Top-shelf municipal bonds were mostly stronger on Thursday morning. The yield on the 10-year benchmark muni general obligation was as much as one basis point lower from 1.97% on Wednesday, while the 30-year GO yield was steady from 2.82%, according to a read of Municipal Market Data's triple-A scale.

U.S. Treasuries were mixed on Thursday morning, as the front end and back end of the curve looks to be flat, while the middle is slightly stronger. The yield on the two-year Treasury slid to 1.29% from 1.30% on Wednesday as the 10-year Treasury yield dipped to 2.25% from 2.26% while the yield on the 30-year Treasury bond was flat at 2.93%.

On Wednesday, the 10-year muni to Treasury ratio was calculated at 87.0% on Wednesday, compared with 86.3% on Tuesday, while the 30-year muni to Treasury ratio stood at 96.2%, versus 95.8%, according to MMD.

MSRB: Previous session's activity
The Municipal Securities Rulemaking Board reported 42,988 trades on Wednesday on volume of $14.154 billion.

Primary market
There are no deals in the negotiated or competitive sector over $100 million slated for sale on Thursday or Friday.

Bond Buyer 30-day visible supply
The Bond Buyer's 30-day visible supply calendar decreased $1.95 billion to $10.16 billion on Thursday. The total is comprised of $4.11 billion of competitive sales and $6.05 billion of negotiated deals.

Tax-Exempt Money Market Fund inflows
Tax-exempt money market funds experienced inflows of $169.2 million, raising total net assets to $129.68 billion in the week ended May 22, according to The Money Fund Report, a service of iMoneyNet.com.

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This followed an outflow of $210.1 million to $129.51 billion in the previous week.

The average, seven-day simple yield for the 232 weekly reporting tax-exempt funds decreased to 0.32% from 0.33% from the previous week.

The total net assets of the 856 weekly reporting taxable money funds increased $5.56 billion to $2.489 trillion in the week ended May 23, after an outflow of $6.91 billion to $2.483 trillion the week before.

The average, seven-day simple yield for the taxable money funds improved to 0.45% from 0.44% last week.

Overall, the combined total net assets of the 1,088 weekly reporting money funds increased $5.73 billion to $2.619 trillion in the week ended May 23, after outflows of $7.12 billion to $2.613 trillion in the prior week.

The latest inflows into municipal money market funds indicate a step in the right direction, but flows have been moderate at best since the massive outflows that occurred after money market reform earlier in the year, according to Tom Galvin, managing director of the short-term products group at Raymond James & Associates in Memphis.

“Assets have been somewhat stable since mid-May, but we haven’t seen huge inflows either,” he said.

Looking at this week’s inflows, Galvin said the growth is moderate, and the market is fortunate not to have outflows.

Flows were negative following tax season, he said.

“The flows are well below where they were without tax season,” he said on Wednesday afternoon, noting a loss of nearly $70 billion in tax-free assets since the seasonal phenomenon that begins ahead of the April tax season.

He says the tax-exempt money market industry is counting on two key events to attract more cash back into the market – the June redemption and reinvestment season and the potential for a June interest rate hike by the Federal Reserve Board.

“June reinvestment will be the big one to see how much will come into the market,” Galvin said. “It could be a couple of billion, or it could go out again.”

Overall, investors are being cautious ahead of both events, he said.

“The one thing we don’t want to do is push rates so low that it causes more assets to leave the market,” Galvin said.

“We are in a market now where since money market fund reform we have gone from over $250 billion in assets in 2016 down to $130 billion – we lost almost 50% over an eight-month period,” he explained.

He said higher rates and a tightening by the Fed should spark increased inflows into MMFs.

“It’s going to take a long time to get back to the $250 billion,” he added.

JR Rieger: The world (of yield) is flat
While there is no doubt that yields for fixed income asset classes are now low and that rates will eventually be higher, the how, when and what that will look like is a total unknown, according to J.R. Rieger, head of fixed income indices at S&P Dow Jones Indices.

The bond yield world is flat, Rieger writes in a Wednesday market comment, adding that “bond yields have been flat in 2017 and have lots of reasons why they could remain in a range for the near term.”

What could hold yields down for longer? He has a long list: uncertainty and the risk-off trade; the low/zero/negative yield environment in Europe and Japan (search for yield); a strong U.S. dollar; and having the new issue supply of investment grade municipal bonds off the pace set in 2016.

“The value proposition for bonds also remains: predictable income, lower volatility than equities and commodities and diversifying asset classes,” Rieger writes. “Eventually rates will rise, the shape of the curve will change and prices will fall and yields will become attractive. Until then the yield world is flat.”

Christine Albano contributed to this report.

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