The tax-exempt market posted a strong week of gains as May 1 coupon payments provided enough demand to meet supply.
Many of the week’s deals were oversubscribed and yields declined in repricings, particularly in lower-rated credits, as investors moved down in credit quality to pick up extra income.
Still, not all investors are bullish on the market moving forward. “Munis were on firmer ground this week with no question,” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. “We think it’s going to be challenging for munis to gain much traction in terms of higher prices and lower yields from this point forward.” Municipal bond mutual funds that report weekly posted their ninth consecutive week of outflows at $391 million, according to Lipper. That is up from the previous week’s outflows of $102 million. On top of that, Friday’s better-than-expected jobs report pushed the unemployment rate down to 7.5%, which does not bode well for fixed income.
“If we continue to see outflows out of muni bonds, with the combination of the jobs report, the market could weaken a bit,” Heckman said. “The dynamics are running against munis with stronger economic activity. It brings back onto the burner if the Fed will curtail asset purchasing programs. It is a real possibility in the third or fourth quarter.”
And with yields so low, it looks unlikely munis can rally much further. “A lot of the market improvement return has already incurred,” he said. “At best we are looking to get a coupon-type return of performance this year.”
With rates still relatively low, investors gobbled up this week’s biggest junk bond deal. Citi priced $1.2 billion of junk-rated Iowa Finance Authority Midwestern Disaster Area revenue bonds for the Iowa Fertilizer Company Project. The bonds yielded 4.80% with a 5% coupon in 2019, 5.10% with a 5.5% coupon in 2022, and 5.30% with a 5.25% coupon in 2025. The bonds are callable at par in 2023.
And the bonds subsequently traded up in the secondary. “I saw those Iowa Fertilizer bonds being offered Thursday at about 30 basis points lower than the issue priced,” a New York trader said. Other traders noted the bonds rallied after pricing. “The Iowa deal was bumped 10 basis points in repricing,” said Dan Toboja, vice president of Ziegler Capital Markets. Then in the secondary, the bonds rallied further and yields fell as much as 33 basis points, he said.Trading activity was up significantly in the secondary after the Iowa deal came to market, according to the Municipal Securities Rulemaking Board.
On Monday, there were 36,514 trades, down from the 30-day average of 39,599. Par value traded was $7.798 billion, down from the 30-day average of $12.168 billion.
Volume was up Tuesday with 41,496 trades, up from the 30-day average of 39,715 trades. Par value traded was $12.151 billion, down from the 30-day average of $12.299 billion.
Activity spiked Wednesday. There were 42,694 trades, up from the 30-day average of 39,658 billion. Par value was came in at $15.624 billion, exceeding the 30-day average of $12.478 billion.
Activity started to slow a bit by Thursday. There were 42,107 trades, up from the 30-day average of 39,584 trades but par value traded came in lower than the 30-day average of $12.435 billion at $12.070 billion.
“It was active and there is good demand and bid levels, but we are certainly not seeing the market as strong as we thought at the beginning of this year in terms of people placing extremely strong bids,” Heckman said.
Yields on the municipal bond scales fell throughout the week.
Through Thursday, the 10-year Municipal Market Data yield dropped three basis points to 1.66% and the 30-year yield slipped eight basis points to 2.79%. The two-year was steady for the week at 0.29%.
The Municipal Market Advisor 10-year yield slipped two basis points to 1.73% for the week through Thursday and the 30-year yield dropped five basis points to 2.95%. The two-year was steady for the week at 0.32%.
Treasury yields were also down for the week through Thursday, then reversed direction in a selloff Friday morning after positive employment numbers. Through Friday afternoon, the benchmark 10-year yield jumped seven basis points for the week and the 30-year yield increased eight basis points. The two-year yield fell one basis point for the week to 0.22%.