Top-quality municipal bonds finished weaker in very quiet activity on Tuesday, according to traders, as the market was winding up business for the holiday week.
The yield on the 10-year benchmark muni general obligation rose one basis point to 1.93% from 1.92% on Monday, while the 30-year yield increased one basis point to 2.82% from 2.81%, according to the final read of Municipal Market Data's triple-A scale.
Treasury bonds were lower on Tuesday. The yield on the two-year yield rose to 0.97% from 0.95% on Monday, while the 10-year Treasury gained to 2.24% from 2.19% and the 30-year Treasury yield increased to 2.96% from 2.91%.
The 10-year muni to Treasury ratio was calculated on Tuesday at 86.3% compared to 87.6% on Monday, while the 30-year muni to Treasury ratio stood at 95.2% versus 96.1%, according to MMD.
Primary Market
There were only a few small deals for the week left on the calendar on Tuesday, none of which was over $40 million. Action is expected to remain muted until after the holidays as there are no deals over $1 million slated until 2016.
Traders were wrapping up their business after a very quiet Monday and ahead of the last full trading session of the week on Wednesday.
"The first trading day of the holiday week won the dull Trifecta. There was little in terms of news flow, trading volume, or price action…," Guy LeBas, Janney's Chief Fixed-Income Strategist, wrote in a Tuesday comment. "It's hard to build a narrative in this market, and will likely remain so through year end, now that the FOMC is cooked, liftoff came and went uneventfully, and the Christmas and New Years' holidays are offering up an extra dose of marketinterruptus."
BAML: No End of Year Rush to Market
Worry about the Federal Reserve's actions and gains in short rates had a dampening effect on municipal issuance for the last few weeks of the year.
"The rising short-term rates, however, were enough to limit refunding volumes so that the anticipated year-end rush to market did not occur," according to a new report from Bank of America Merrill Lynch Global Research. "Lower issuance and pent-up demand drove performance much more than concern about the Fed."
Issuance for the month was $19.8 billion as of Dec. 17, according to BAML, down 46.4% compared to the same period last year.
For the year to date, issuance is $393.6 billion, up 16.8% compared to the same time period in 2014. Of the total issuance so far this year, 62.2% is related to refundings versus 57.1% in the same period last year.
Meanwhile, municipal bond performance was solid in December, BAML said.
The BAML Municipal Master Index returned 0.519% in December, with the long-end outperforming the short-end of the curve by a wide margin. The 22-year-plus index returned 0.847% versus the one- to three-year index's return of -0.062%.
The BAML Muni Master Index has returned 3.270% for the year-to-date through Dec. 10 and outperformed both the Treasury Master Index and the U.S. Corporate IG Master Index which had total returns of 1.074% and -0.379%, respectively.
The best performance in munis for the year-to-date has been in the 22-year-plus maturities and the triple-B sector.
Morgan Stanley Wealth Management Looks Back, Ahead
"With little time left on the shot clock, 2015 seems to have been a year of clipping coupons, as municipal benchmark yields appear to be ending the year close to where they began, yet total return year to date is almost 3%, according to Barclays," Morgan Stanley Wealth Management said in its latest Municipal Bond Monthly report.
"Indeed, it has been an impressive, yet thankfully uneventful, year for the vast majority of tax-exempt bonds, and municipal bondholders have thus far been 'paid to wait' for the Fed via tax-free income…and also the primary driver of that nearly 3% total return," MSWM Managing Director John Dillon and Executive Director Matthew Gastall wrote.
The municipal bond market is now entering the home stretch, having sidestepped the spread widening seen in the corporate bond market and the volatility experienced in the stock market.
"As redemptions rise through December and into January, and with new issuance having already plummeted, we anticipate diminished supply through mid-January," they said.
"Looking forward, our strategy remains intact, with neutral portfolio duration and a new money focus range of 15-to-25 year maturities (best bought on weakness)," they wrote. "We anticipate further flattening of the yield curve, with bonds beyond 10 years outperforming shorter maturities."
There was one last trend of note, they said.
"We would like to mention a comment we heard recently that 'Other than Puerto Rico, munis just haven't been very exciting to talk about lately.' While obviously not meant as a compliment, we couldn't agree more. In fact, we wouldn't have it any other way," Dillon and Gastall wrote. "The vast majority of tax-exempt municipal bonds did exactly what they were supposed to in 2015, namely the preservation of principal and the steady provision of tax-free income without fanfare or incident. Add to this a nearly 3% total return for the asset class year to date and we'll take boring any time. It's important not to lose sight of the long view."
MSRB Previous Session's Activity
The Municipal Securities Rulemaking Board reported 33,705 trades on Monday on volume of $4.27 billion.
