A moderately weak tone swept over the municipal market Monday, bathing it in slightly higher yields, thin volume in the secondary, and limited enthusiasm for the day’s primary issuance.
“We’re getting some clearing for some of the primary deals that are supposed to be coming,” a trader in North Carolina said. “There have been some adjustments for dealer inventories in anticipation of that.”
Tax-exempt yields were mostly weaker Monday, according to the Municipal Market Data scale. Yields through 2013 were unchanged. Those from three to seven years were two or three basis points higher. Beyond that, yields rose by three to five basis points.
The 10-year muni yield jumped five basis points to 2.02%. It had been at a record low of 1.97% for the two previous sessions.
The 30-year yield climbed three basis points on the day to 3.44%, up from its all-time low. The two-year yield remained at 0.32% for an eighth straight session.
Treasury yields picked up where they left off last week: they weakened across the curve. To put the rate increases into perspective, though, they follow some incredible rallying at the intermediate and longer parts of the curve the past couple of sessions. The benchmark 10-year Treasury yield jumped seven basis points to a still-low 1.90%.
The 30-year yield, which plunged as much as 53 basis points last week, climbed 10 basis points to 3.00%. The two-year yield increased two basis points to 0.24%.
The buy side naturally wants higher rates, the trader said. But they’re coming to the realization that these low rates are here to stay.
“Most of the funds are fairly well-positioned,” he added. “But for the high-net-worth money manager who has to put money to work, it’s a little more challenging from that standpoint.”
The market expects a slight decrease in new supply for this week, after a substantial increase in issuance last week. This week, the market expects an estimated $6.83 billion in new supply. Last week saw a revised $7.86 billion of volume.
At these rates, tax-exempts are attractively priced when compared to alternative taxable fixed-income investments in general and taxable munis, specifically, JPMorgan fixed-income analyst Peter DeGroot wrote in a recent research report.
“We expect [this] week will see a healthy bid from crossover investors interested in relative price gains, high taxable equivalent yields, and finding high-quality longer-duration assets,” he said.
In the negotiated market, Siebert Brandford Shank & Co. priced for retail investors $752.41 million of New York City general obligation bonds in three series.
The institutional order period is expected Tuesday, following the second day of retail sales. The bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
Yields rose five basis points across the curve at repricing, with the first series, $584.8 million of Series D GOs, yielding from 1.47% with coupons of 4.00% and 5.00% in a split maturity in 2017 to 3.95% with a 3.875% coupon in 2037. Credits maturing between 2024 and 2031 are not offered for retail.
Yields for the second series, $30 million of Series E, mature in 2023 and weren’t offered to retail. Yields for the third series, $137.6 million of Series H GOs, ranged from 0.37% with a 3.00% coupon in 2013 to 2.23% with coupons of 3.50%, 4.00% and 5.00% in multiple maturities in 2020.
Yields were raised five basis points, to these levels, for the five- and nine-year credits at repricing.
Retail interest in New York City GOs has been underwhelming, a trader at one of the firms that co-managed the deal said. Yields in some series have been raised five basis points in a repricing, and may have to be raised again, he speculated.
“We didn’t know if it was because it was a Friday, or because of the price,” he said, “but when you have a 3.00% coupon on the max maturity, that’s real sticker shock.”
Morgan Stanley priced $122.8 million of Connecticut Development Authority revenue refunding bonds for the Connecticut Light & Power Co. project. The bonds were rated A2 by Moody’s and A-minus by S&P and Fitch. They were priced at par to yield 4.25% in 2028.
JPMorgan’s fixed-income group listed several ways in which they expected the recent sizable drop in yields will affect the municipal market over the immediate and long term.
From a short-term outlook, lower yields lead to better returns and attract capital in the fund space, according to DeGroot.
Over the past several weeks cumulatively, long-end funds have received new capital for the first time this year, he wrote. Intermediates and high yields have also received new capital.
“It is not a coincidence that the long end of the market has rallied harder than any other point on the curve,” he wrote. “We expect long-term funds will sustain inflows over the near term.”
What’s more, DeGroot added, the low-yield environment will encourage additional support for spread product, particularly inside of 15 years on the curve, where the roll down increases and rate risk decreases against longer-dated bonds.
The longer-term outlook is shrouded by the possibility of a risk-on again trade, as some portion of the fight-to-quality trade is reversed and yields stabilize at new historic lows, DeGroot wrote. Yield changes will dictate the impact on fund flows.
“Should yields flatline at current levels,” he added, “demand would become slack reflective of the unimpressive rates.”
Finally, the lower and flatter curve will also prompt more refunding supply through year-end, DeGroot wrote. Issuers who were waiting for a flatter curve to moderate negative arbitrage may be encouraged to come to market.