The municipal market was quiet and unchanged yesterday, ending a string of trading sessions where firmness reigned for more than two weeks.
“It’s pretty flat right now,” a trader in New York said. “There’s not a whole lot going on in the secondary market at the moment; I’m not seeing a whole lot of trading. So, it’s pretty quiet, and there’s not a whole lot of movement either. I’d say we’re just flat right now.”
“It’s been a bit of a quiet day,” a trader in Los Angeles said. “We should see some pretty decent activity this week, especially out here with the new issues we’ve got coming, but it’s a bit of a slow start to the week. We’re pretty unchanged today — I’m not really seeing things moving in either direction at all.”
The Treasury market was mixed yesterday. The yield on the benchmark 10-year note, which opened at 3.22%, finished at the same level. The yield on the two-year note finished at 0.88% after opening at 0.89%, and the yield on the 30-year bond, which opened at 4.00%, finished at 4.01%.
Also yesterday, the Municipal Market Data triple-A scale yielded 2.57% in 10 years and 3.43% in 20 years, matching their record lows, which were reached Friday.
As of Friday’s close, the triple-A muni scale in 10 years was at 80.6% of comparable Treasuries, according to MMD, while 30-year munis were 95.7% of comparable Treasuries. Alt Friday’s close, 30-year tax-exempt triple-A general obligation bonds were at 98.7% of the comparable London Interbank Offered Rate.
The California municipal market is gearing up for a week of brisk activity as the state plans to sell $4.5 billion of general obligation debt — including Build America Bonds — while two other issuers ready sizable offerings. The issuance will contribute to the estimated $9.08 billion of new volume expected this week, according to Ipreo LLC and The Bond Buyer.
As the state prepares for its sale, the California market has been characterized by increased demand for in-state paper due to the rise this year in state income taxes to a top rate of 9.55% from 9.30%, as well as tighter spreads on GO bonds as a result of the swell in BAB debt, according to market participants.
In addition, the Golden State GOs will come to market with split ratings from the three major agencies. Moody’s Investors Service has assigned a Baa1 to the GOs, while the bonds are rated A by Standard & Poor’s and BBB by Fitch Ratings.
The deal is expected to consist of $1.3 billion of tax-exempt securities, $2 billion of taxable BABs, and $1.2 billion of traditional taxable securities. The bonds will be priced on Thursday after a two-day retail order period planned for today and tomorrow. Citi and Bank of America Merrill Lynch are the joint book-runners for the tax-exempt bonds, while Goldman, Sachs & Co. and JPMorgan are joint book-runners for the taxable bonds.
Morgan Stanley Smith Barney’s George Friedlander wrote in a weekly report, “the municipal bond market continued to rally [last] week, particularly on the long end of the market.”
“Yields on long-term triple-A GOs were down another 18 basis points, even as paper from one to seven years was unchanged, and yields on intermediate maturities were off roughly four to five basis points,” he wrote.
“The key factors driving muni yields lower are record flows into muni bond funds, even as long-term tax-exempt supply is being reduced by the popularity among issuers of Build America Bonds. The muni market may also have gotten an assist from the drop over the past week in longer maturity Treasury yields, which had been trendless before that since the end of August.
“We would note that there is probably another factor pressuring muni yields, although somewhat less directly: Yield spreads against Treasuries in all major taxable sectors have also quite literally collapsed,” Friedlander wrote. “For example, the yield spread on the Citigroup high-grade index is down from a high in the 700 basis point range to about 220 basis points.
“On the high-yield index, the decline is from 1800 basis points to about 780. What appears to be going on is simply that the fixed-income universe is once again awash in cash, and with yields on cash and near-cash instruments hovering painfully close to zero, investors feel compelled to take both market and credit risk by moving out in maturity and in many cases, down in credit quality, at least to a degree.”
In a weekly report, Matt Fabian, managing director of Municipal Market Advisors, wrote “the municipal market presents a conundrum for current investors.”
“Mean reversion implies that very low, even record low yields will need to rise at some point, and credit fundamentals are not encouraging,” he wrote. “And should floating rates begin to rise, earlier maturity fixed-rate bonds may immediately see a negative effect. However, investor dollars escaping from equities and money funds continue to flood into managed accounts, and the scarcity of tax-exempt bonds — worsened by the growing presence of Build America Bonds — is demonstrable.
“In addition, long-term trends continue to favor tax-exempt fixed income as an alternative to taxables; rising tax rates, aging investors, slowing growth; and durable credit quality all favor municipal outperformance,” he wrote.
“Thus, today’s buyers need to be prepared for higher absolute yields in the medium term, but both immediate and long-term expectations are favorable. This week’s BAB-heavy calendar presents another challenge, in particular with the wealth of negative media reporting on California over the weekend.”
In economic data released yesterday, the Institute for Supply Management’s non-manufacturing business activity composite index was 50.9 in September, up from 48.4 in August. Economists polled by Thomson Reuters had expected a 50.0 level.