Municipal bonds traded weaker in every session this week as most primary deals were priced cheaply to attract buyers while secondary sellers on longer-maturing bonds pushed rates higher.
"The week can be characterized as watching interest rates rise and grind upward," said Richard Ciccarone, chief research officer at McDonnell Investment Management. "A continuation of a trend we've seen throughout 2013 is outflows from funds. There is a strong correlation between a prolonged interest rate increase and outflows. So as long as interest rates are poised to go upward, outflows could accelerate."
For the week ending Aug. 14, municipal bond mutual funds that report weekly saw $1.21 billion in outflows, according to Lipper. Outflows extended into a 12th consecutive week and increased from the previous week's $974 million.
In the primary market, new deals appeared to get done, with California's $5.5 billion in revenue anticipation notes getting four-decade low yields. "That deal was in the short end of the market, where investors are anxious to protect against the upside in interest rates," Ciccarone said.
Not all other deals were as successful. Connecticut issued $400 million of general obligation bonds and raised yields as much as 11 basis points to entice buyers. Dallas-Fort Worth International Airport cut its deal by almost half after the U.S. Justice Department said it opposed the merger between American Airlines, the airport's largest tenant, and US Airways.
The main focus on the new issues should be the taxable equivalent yields that make these deals look so attractive, Ciccarone said. "If you look at the single-A rated bond issues and go out 20 years, you're getting a taxable equivalent yield of 8%," he said. "You have to go below investment grade to get that in any other fixed income market. So munis are attractive to taxables."
In the secondary market, Ciccarone said retail investors are more active. "There are more odd-lot sales as retail is trying to capture the higher yields in the marketplace," he said, adding that yields on the Bond Buyer Index are approaching a two-year high. "The long-end outside 10 years is very attractive and a number of people have started to notice that."
Throughout the selloff that started in May, triple-A to single-A spreads widened as yields rose. This week, spreads on lower-rated credits held steady even as rates increased. "That reflects that the spreads are already fairly wide to begin with and any concern in the market this week about credit stories has not moved the market out much further," he said. "With outflows, you usually see spreads widening too. So maybe we have absorbed most of the effects of Detroit."
For the week through Thursday, the 10-year Municipal Market Data yield rose 13 basis points to 2.85%. The 30-year yield increased nine basis points to 4.37%. The two-year was steady at 0.43%.
The 10-year Municipal Market Advisors scale jumped 10 basis points for the week through Thursday to 3.00% and the 30-year yield rose 13 basis points to 4.46%. The two-year yield increased one basis point to 0.55%.
Treasury yields jumped. For the week through Friday afternoon, the benchmark 10-year yield jumped 27 basis points to 2.85% and the 30-year yield climbed 24 basis points to 3.88%. The two-year yield rose five basis points throughout the week to 0.36%.