Traders Ready for Ramp-Up in Activity

Municipal bond traders are gearing up for a busy December, expecting new supply and billions of dollars in reinvestment money.

One trader noted that on Dec. 1, almost $30 billion of cash could be available from maturing muni bonds and semi-annual interest payments, and that money will need to be put back to work.

Analysts at Citi expect new issuance for the first weeks in December will meet the demand. “We expect issuance to rebound after the Thanksgiving hiatus, but only for about two weeks,” wrote George Friedlander. “We would continue to put cash to work while the calendar remains active.”

“The best time to accomplish swaps for restructuring purposes is likely to be through early December, after which bid-offer spreads tend to widen out as many firms reduce activity,” he said.

The market is expected to absorb new supply in early December fairly well ahead of a drop-off in activity in late December and early January.

“The key question as yearend approaches is as to whether there is going to be a rally into the new year as new-issue supply dries up and cash enters the market from heavy bond calls and maturities,” Citi analysts wrote. “It is likely that such a rally will occur this year.”

A trader in New York said there are just a few weeks of real trading left before the new year. “There are three solid weeks left on the calendar, and that’s it,” he said. “But with rates as low as they are, there are a bunch of refundings trying to get into the market,” which could make those early December weeks fairly busy.

A second trader in New York said December and January have “been typically our busiest months.”

Traders are also looking at muni-to-Treasury ratios as a good indication of where the muni market stands. “Heavy supply and low yields have collectively elevated five-year and 10-year ratios to levels rarely seen since the credit crisis in 2008 to 2009,” wrote JPMorgan analyst Peter DeGroot.

The ratio of five-year muni yields to Treasury yields is currently 129.5%, approaching a high not seen since early 2009. The 10-year muni-to-Treasury ratio is 115%, a range which, except for October of this year, it had not approached since early 2009. The 30-year muni-to-Treasury ratio is 129.3%, a level not seen since early 2009.

But while ratios make munis look extremely attractive, some disagree. “As yields approach 1%, retail gets easily discouraged,” said Domenic Vonella of Municipal Market Data. “So just looking at ratios is a frustrating game due to historically low rates.”

The Thanksgiving week was, not surprisingly, slow. “There was not much of anything coming to market,” a trader in New York said. But in the secondary, bonds were trading “very, very cheap.”

This trader said he found health care names that are very cheap as well as some higher education bonds. “Our suspicion is that with new issuance, larger firms are participating in those and in order to raise cash, they are selling secondary holdings.”

On Wednesday, the two-year muni yield closed flat at 0.42% for its 16th consecutive trading session. The 10-year finished at 2.21% and the 30-year yield closed at 3.75%.

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