Puerto Rico Fears, Sellers Push Muni Yields Higher For Week

The municipal bond market took direction from secondary trades and Treasuries in the past week as a light new-issue calendar took a back seat.

VIDEO-Muni Week in Review: September 6, 2013

Puerto Rico and the continued price decline over the past few weeks were high on most traders’ minds. The Standard & Poor’s Municipal Bond Puerto Rico General Obligation Index has fallen 1.66% this month  and more than 16% year-to-date. The S&P Municipal Bond Puerto Rico Index returned a negative 1.79% for September and over 17% year-to-date.

“Puerto Rico has serious debt issues,” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. “There are concerns about single-state funds that have heavy exposure to Puerto Rico and a lot of retail investors don’t realize that a Maryland state fund, for example, could have as much as 30% of Puerto Rico bonds. Retail is voting with their feet and leaving the market.”

Beyond secondary trading activity on Puerto Rico bonds that have pushed longer maturities to yield above 8%, an overall softer tone in munis came from the direction of Treasuries this week.

“It’s difficult for bond investors to step in front of a Fed decision, whether it’s who will take over the Fed chairman role or the amount of tapering and the time frame,” Heckman said. “Coupled with concerns with credit quality, investors are moving out of funds. Munis are very attractive for high income tax individuals but until buyers step back in the market it’s going to be a struggle for munis to rally.”

As of Thursday afternoon, muni-to-Treasury ratios were nearly all above 100%, making munis look attractive to crossover buyers. Still, Heckman said that until buyers are willing to step up, high ratios won’t matter. “Ratios are over 100% but it’s just a matter of trying to find investors who are willing to buy in this environment. It’s an odd environment where people are selling and probably going into cash to wait out the Fed and geo-political risk.”

The 10-year muni yield to Treasury yield ratio closed at 102% on Thursday and the 30-year yield finished the session at 116.5%. The five-year ratio closed below 100% at 86.3%.

Secondary trading activity compiled by Interactive Data showed activity dropped off across the board.

For all trades, customer sells fell to $2.072 billion in 9,115 trades on Tuesday, down from the previous Tuesday’s $2.807 billion in 11,354 customer sell trades. Customer buy trades fell to $2.365 billion in 19,983 trades on Tuesday, down from $3.458 billion in 24,345 buy trades the previous Tuesday. Interdealer trading volume also dropped off to $1.479 billion in 13,974 trades from $2.399 billion in 16,142 trades.

On Wednesday, customer sell trades increased, but buy trades dropped. Sell trades rose to $2.367 billion in 10,029 trades from the previous Wednesday’s $2.182 billion in 9,972 trades. Customer buy trades fell to $3.488 billion in 24,627 trades from $3.925 billion in 25,077 trades. Interdealer trading fell to $2.186 billion from $2.472 billion. The number of trades rose to 17,144 from 15,776.

For the week through Thursday, the 10-year Municipal Market Data yield rose 10 basis points to 3.04% and the 30-year yield increased six basis points to 4.51%. The two-year was steady for the week at 0.43%.

The 10-year and 30-year Municipal Market Advisors yields increased seven basis points for the week through Thursday to 3.16% and 4.61%, respectively. The two-year was steady at 0.55%.

Through Friday afternoon, Treasury yields were up 16 basis points each on the 10- and 30-year bonds to 2.91% and 3.84%, respectively. The two-year yield rose seven basis points to 0.46%.

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