Municipal market investors sat on their collective hands Monday, wary of the low nominal yields and content to wait for the week's largest new deals to give some direction.
Little in the way of significant new issuance or intriguing bid-wanteds emerged from the primary or secondary markets to entice buyers from the sidelines. And all of the big institutions that one trader in California followed were content to stay in cash for the time being.
"A lot of them are getting some redemptions," he said. "So they're feeling out this week to see if the redemptions will continue, rather than spending their cash. They don't want to buy and then have to sell right away."
Muni yields on the day were mostly steady, with some strength found in spots along the curve, according to the Municipal Market Data scale.
Yields for tax-exempt debt maturing to 2013, from 2016 to 2018, and beyond 2019 were unchanged. Maturities in 2014 and 2015 were two basis points lower. And those maturing in 2019 fell one basis point.
Munis started this week much as they ended last week: unchanged. The 10-year muni yield held steady at 2.26%, its lowest yield since Sept. 3, for a fourth straight session.
The two-year muni yield stayed at 0.30%, its lowest yield in more than two years. And the 30-year muni yield was steady at 3.88%, still its lowest level since Nov. 2.
Unlike munis, Treasury yields softened across the curve, particularly in the afternoon. The benchmark 10-year Treasury yield rose six basis points to 2.30%.
The 30-year yield also increased six basis points to 3.77%. The two-year yield ticked up one basis point to 0.20%, still two basis points above its all-time low.
A stronger primary market is expected this week. This entails an anticipated boost in new deal volume to around $5.28 billion. That is up from the slight $2.25 billion of municipal bond sales seen last week.
The industry is particularly interested in the two new deals Morgan Stanley is expected to price this week, both negotiated bids. These include more than $1 billion of Indiana Finance Authority wastewater utility revenue bonds. The bonds should be priced for retail on Wednesday, and for institutions the following day.
The firm is also prepared to price $980 million of California Department of Water Resources power supply revenue bonds. Retail investors should have a crack at them on Tuesday, with institutional investors expected to have their shot on Wednesday.
"The talk is it's going to come in a little wider than where the high-grades are trading, but right around there," the California trader said, referring to the deal. "If this thing clears, the market might rally again. There's just really no other comparison out there."
Citi analyst George Friedlander identified in a recent report several explanations behind why the market held onto three weeks worth of gains throughout last week's turbulence. He also predicted how investors might respond in the coming weeks, given conditions in and around the market.
Muni yields have remained low over the past three weeks, he cites, due to exceptionally light new-issue supply, the continuing collapse in short- and intermediate-term yields, individual investor interest in munis during the flight from equities and riskier fixed-income assets, and the message the Federal Reserve sent the markets when it said it would hold short-term rates at current near-zero levels for at least another two years.
Consequently, Friedlander added, the tax-exempt market should see a combination of more muni buying and more selling in maturities whose yields have fallen sharply, extension swaps, and a possible tendency to reach for yield by focusing less on credit quality.
"We believe that yields are likely to head somewhat higher as new-issue supply rebounds, which we expect it to do after Labor Day," Friedlander wrote. "So, investors with cash to spend or a desire to increase maturity to increase yield may wish to take more time than usual to do so, unless specific blocks become available at a reasonable price that fit an investor's needs."
A trader in Florida, after conversations with many of his money-manger accounts, said he anticipates a growing resistance to buying in the high-grade, 10-year range in his outlook for active sectors for the week. This follows on the heels of last week's spate of buying in the space.
"From the people I've spoken to, especially a lot of the accounts, their bearish sentiment has increased significantly," he said. "And until they get comfortable with rates, there might be a continued sell pressure from some of the accounts this week."
All told, though, the trader said there's no reason to believe the 10-year, high-grade part of the curve should weaken based on what the market did last week.
"That high-grade paper that was there had all traded, so there's thinner paper out there," he said. "It all bodes well for performance of that part of the sector. But, if there's renewed selling from the accounts, we might find some more paper to be able to occupy that part of the space."
The equities markets, which more or less dictated performance in the fixed-income markets last week, ended the day higher, with the major indexes all rising at least 1.88% from Friday's close. The Dow Jones Industrial Average climbed almost 214 points.
In economic news, home builders still see a grim housing market, underpinned by an equally grim and uncertain economy and job market. The monthly gauge of builder sentiment, the National Association of Home Builders' housing market index, held at 15 in August, not much better than the record low numbers posted earlier this year.