The tax-exempt market struggled all week to find its balance as bonds were cut in the primary and secondary for most of the trading sessions.
Traders said the market came in heavy at the beginning of the week as it was overloaded by balances left over from deals the week prior. By Thursday, the market was able to stabilize and ended the week on a steady tone.
“The market was certainly weaker until Thursday and I think the weakness was probably anticipatory,” said Jim Colby, portfolio manager and senior market strategist who oversees six muni ETFs with $2.1 billion in assets at Market Vectors ETFs. He added the market was waiting for the employment situation to come out Friday. “We are not that far from absolute lows in yields and if investors are given any reason to step back or step away from the market, they will be more cautious.”
He added with fairly low supply, the market was not driven down by an overwhelming primary market. “The market traded off through Wednesday and the calendar was not robust [enough] to suggest it was supply that drove prices lower. Even Thursday when the market seemed to find a bottom, we saw slightly weaker trades until the afternoon. Dealers were clearly reluctant to jump in ahead of jobs numbers Friday.”
Others agreed that towards the end of the week, market tone started to improve. “Munis felt better with new issues successfully placed and bid sides remaining stable or up slightly,” wrote Dan Toboja, vice president at Ziegler Capital Markets. “In part that has something to do with the large deals that were pulled from the primary calendar and thinned the amount of supply that came in.”
Still, Colby said the market has had positive performance for the month of January and continued to see municipal bond inflows this week. “There is still plenty of investable cash. And behind the headlines, this bodes pretty well for the market.”
Inflows have indeed helped support the market again this week. It’s interesting to note high-yield muni funds had only $83 million come in – a significant drop from the previous week of over $270 million,” Ziegler’s Toboja said. “Buyers have been chasing yield for over a year now, compressing spreads on lower-rated bonds. Even with the slightly lower number this week, as long as triple-A yields remain so low, spreads will not widen as buyers continue to hunt for yield.”
In the primary, deals struggled to find buyers. Traders noted that balances were left over and several deals were even postponed.
On Wednesday, Illinois was expected to come to market with $500 million of general obligation bonds in the competitive market, but held off as early indications showed buyers weren’t willing to pay up after the state’s downgrade by Standard & Poor’s one notch to A-minus.
“The indications were a lot wider and a bit higher than we anticipated so we felt it was prudent to pull the deal,” state capital markets director John Sinsheimer said Wednesday of the spreads he was expecting in broker-dealer bids. “We were hearing that investors were still reacting to the rating agency actions and wanted to give the market more time to digest the news and settle down a bit.”
On Thursday, Goldman, Sachs & Co. was expected to price $258 million of Wisconsin transportation revenue bonds and that deal was delayed due to market conditions.
“We were ready to go today, but decided against it,” said David Erdman at the Wisconsin Capital Finance Office Thursday. “We are monitoring the market and will move forward when the market has better tone.”
The biggest deal that priced, $1.5 billion JobsOhio Beverage System taxable and tax-exempt bonds, had tepid demand during the retail period but was able to lower yields by five basis points in the institutional order period.
Colby added reception was fair this week in the muni primary market. “There were specific spots of buying and investor interest in very specific maturities. But the calendar isn’t going to be overwhelming in the coming week or two so investors who might be passing on issues of this week know they can reengage in new deals down the road.”
In the secondary market, trades were mostly weaker throughout the trading sessions until Thursday.
Standard & Poor’s upgraded California one notch to A on Thursday and bonds subsequently traded higher. Yields on California 5s of 2017 dropped five basis points to 0.88% while California 3s of 2024 fell two basis points to 2.38%.
According to data from the Municipal Securities Rulemaking Board, activity increased as the week wore on.
On Monday, there were 36,777 trades, down from the 30-day average of 39,749 trades. Par amount traded was $7.716 billion, down from the 30-day average of $10.956 billion.
On Tuesday, there were 40,650 trades, just slightly above the 30-day average of 39,417 trades. Par amount traded was $12.409 billion, just above the 30-day average of $10.774 billion.
By Wednesday, there were 41,595 trades, above the 30-day average of 39,423 trades. Par amount traded was $12.790 billion, above the 30-day average of $10.743 billion.
On Thursday, there were 41,729 trades, above the 30-day average of 39,234 trades. Par amount traded was $14.262 billion, up from the 30-day average of $10.854 billion.
In retail trades of under 100 bonds — or $100,000 par value — secondary activity was higher this week than last week, according to data from BondDesk Group.
There were 56,438 buy trades for the week ending Jan. 30 compared to the previous week’s 45,991 buy trades, but were lower than the two weeks prior. Sell trades were up to 35,271 versus the previous week’s 26,610 sell trades, and were higher than the previous five weeks.
The ratio of buy trades to sell trades fell slightly to 1.6 for the week ending Jan. 30 from 1.7 for the previous week ending Jan. 23.
Dollar volume traded also rose. There were $1.595 billion buy trades for the week ending Jan. 30, up from the previous week’s $1.274 billion buy trades. Sell trades also jumped to $1.030 billion from the previous week’s $782 million. Par amount of sell trades were higher than the previous five weeks.
The ratio of buy trades to sell trades in dollar amount fell to 1.5 from the previous week’s 1.6 and was the lowest of the last five weeks.
Overall for the week, municipal bond market reads ended lower.
The 10-year Municipal Market Data yield finished up seven basis points to 1.82% while the 30-year yield also closed up seven basis points to 2.86%.
The 10-year Municipal Market Advisors yield closed up seven basis points to 1.84% for the week while the 30-year yield finished six basis points higher at 2.94%.
Treasury yields also ended higher for the week, though less so than muni yields. The 10-year yield rose one basis point for the week at 1.97% while the 30-year yield finished up three basis points to 3.17%.
