Slow trading, fading Treasuries and a slender calendar pushed yields higher in the municipal market Monday.
Tax-exempt high-grades closed the day flat for bonds maturing in four years or less, and weaker for longer-term issues, though not by more than three basis points.
“It was quiet,” a trader in California said. “The market has kind of followed what Treasuries were doing. We’re not seeing a lot of guys participating right now.”
Muni yields appeared to have moved into a new range, according to a Chicago trader. The 10-year triple-A hovered in the 2.60%-3.00% area, guided by Treasuries, muni volume and, to a lesser degree, Detroit. The heavier the supply, the more the 10-year Treasury influences the tax-exempt market, he said.
“This week, we could go back and forth here,” he said. “I don’t see [prices] going down precipitously here in the next day or two. No one seems to be that anxious yet.”
As for supply, the market anticipates modest volume for the week, at just $4.10 billion, compared with last week’s revised $3.82 billion.
This breaks down into $3.40 billion in negotiated deals expected, representing an increase from last week’s revised $3.18 billion, and $702.8 million to be auctioned on the competitive side of the ledger, up from last week’s revised $635.4 million.
Bank of America Merrill Lynch priced for retail the week’s largest deal: $849.2 million of the New Jersey Transportation Trust Fund Authority transportation program bonds. The bonds are rated A1 by Moody’s Investors Service and A-plus by Standard & Poor’s and Fitch Ratings. Official pricing is expected Tuesday.
Yields range from 0.70% with a 2.00% coupon in 2015 to 5.19% with a 5.00% coupon in 2044. Credits maturing in 2025, 2026, 2028, 2030 through 2033 and 2038 are not available for retail. The bonds are callable at par in 2023.
B of A Merrill also priced for retail $308.4 million of Columbus, Ohio, general obligation bonds in two series. The bonds are rated triple-A by the major credit ratings agencies.
Yields in the first series, almost $217 million of various purpose unlimited tax bonds, range from 0.51% with a 5.00% coupon in 2015 to 4.50% priced at par in 2034. Debt maturing in 2025 through 2030, as well as in 2032 and 2033, was not priced for retail.
Yields in the second series, $91.4 million of various purpose limited tax bonds, range from 0.51% with a 4.00% coupon in 2015 to 4.23% with a 4.125% coupon in 2029.
The bonds in both series are callable at par in 2023.
The market struggles for price discovery most of the time, a trader in Texas said. When there are a lot of deals, he added, even though the calendar is heavy, there are a lot more chances for price discovery.
“So, when the new issue calendar is light, we tend to drift anyway,” he said. “And with Treasuries drifting, that could make for a tough week.”
Trades in the secondary market compiled by data provider Markit showed weakening.
Yields on California’s Golden State Tobacco Securitization Corp. 5s of 2033 rocketed 60 basis points to 8.05% and Orlando and Orange County Expressway Authority, Fla., 5s of 2035 rose four basis points to 5.11%.
Yields on Metropolitan Transportation Authority, N.Y., 5s of 2023 and University of Virginia 5s of 2043 rose three basis points each to 3.39% and 4.43%, respectively.
Yields on Ohio State University 4s of 2031 rose three basis points to 4.58%.
Crossover buyers have been active, the trader in Texas said. At these yield levels, there is fundamentally sound underlying support for munis. However, he added, credits priced at deep discounts at certain maturities are performing poorly.
“The 2s in the 10-year range, the 3s in the 20-year range and 4s out long, all that stuff is really adjusting,” he said. “And you don’t notice it because [Municipal Market Data] covers 5s, and it’s the discounts that are getting run over.”
Outflows from Muni bond mutual funds continue to apply pressure to the market and disrupt pricing, but their scope isn’t surprising, Matt Fabian, a managing director at Municipal Market Advisors wrote in a research report.
By the time they reached their apex in March, the tax-exempt funds had added almost $70 billion in cumulative weekly inflows since 2011, which represented a 15% jump in assets under management before any capital appreciation, Fabian wrote.
As an important point of consideration, much of this investor money may not have been intended as a long-term allocation to tax-exempts, but instead as a medium-term “momentum trade to ride bonds richer amid expectations of [quantitative easing]-forever,” he wrote.
“It follows that,” he added, “once the related temporary gains in bond prices were realized, investors would retrain their cash elsewhere. To an extent this likely has also occurred with direct purchases of bonds, but that side of the business being far less liquid and charging far higher entry and exit fees (i.e., trade commissions), it is the funds which have represented the larger source of ownership volatility in the recent era.”
Tax-exempt yields closed Monday’s session up to three basis points weaker beyond the front of the curve, according to the MMD scale. They were unchanged through four years and weakest at six years.
The 10-year triple-A yield ticked up two basis points to 2.90% and the 30-year yield inched up one basis point to 4.40%. The two-year finished flat at 0.43% for the 24th straight session.
Yields on the Municipal Market Advisors scale ended as much as three basis points higher. The 10-year yield climbed two basis points to 3.04%; the 30-year yield also rose two basis points to 4.51%. The two-year was steady at 0.55% for the third session.
Treasuries weakened beyond the front end of the curve on the day. The benchmark 10-year and the 30-year yields increased four basis points each to 2.88% and 3.90%, respectively. The two-year yield held at 0.36%.