Early indications of July 1 reinvestment appeared mediocre this week as investors took a much-needed break from the municipal market.
Some were preoccupied by the July 4th holiday and Friday’s June employment figures, others were still reeling from the volatility of the historic sell-off two weeks ago, municipal players said.
An estimated $37.23 billion of total redemptions were expected to arrive in investors’ accounts on Monday, according to Interactive Data Pricing and Reference Data.
Muted trading levels this week — on the heels of $4.53 billion of outflows from municipal mutual funds in the week of June 26 — suggest investors are aren’t in a rush to spend those proceeds, according to sources.
“We know there’s a lot of money out there, but it’s kind of quiet this week,” said an institutional municipal trader at a Denver-based firm.
Investors are tired and weary, traders and underwriters said, after the roller- coaster ride that began on June 19 when Federal Reserve chairman Ben Bernanke announced that the Fed may be tapering its bond purchasing program this year. Others are delaying reinvestment decisions because some larger deals remain postponed following the sell-off.
“At the moment, all that has to do with the volatility of the market,” a New York underwriter said of this week’s lull.
Investors are sitting on the sidelines, she said, looking for market stability in the aftermath of what was the worst three-day selloff in a quarter century.
“We had a heck of a downdraft for a couple of trading days,” she explained. “They are waiting to see where the market stays and where we are on Friday. They want to make sure it’s real in here.”
There was some sporadic reinvestment demand on Tuesday, but not enough to make a noticeable difference.
“It looks like some bonds are going away this week,” said Rick Cahill, a managing director at Herbert J. Sims & Co. “I think direct-purchase individuals like the backup, and are spending July 1 money before vacations,” he explained.
Institutions, meanwhile, are waiting for more supply.
“I expect funds to hold rollover dough for a while,” Cahill said. “Institutions are just being cautious. They have chunks of cash and need a bigger calendar.”
Another New York trader said Friday’s June employment report was weighing on the market during the holiday-shortened week in which he noticed a handful of investors spending July 1 rollovers, though not a ton.
That should all change by next week, when investors return from the long holiday weekend and “there is some direction provided by a new-issue calendar of size and variety,” a municipal trader in New York said.
“In a holiday week with low volume and low activity, when you come back next week, everyone reassesses the market and gets a fresh start,” he added.
Heavy retail demand, he said, following the 60-basis-point correction over three sessions between June 19 and June 25 indicates that retail is definitely hungry for the higher yields as evidenced by the $1.3 billion Illinois general obligation sale that was six-and-a-half times oversubscribed when the market began rallying last Wednesday.
The 2038 maturity priced to yield 5.65%, 182 basis points higher than the benchmark triple-A GO scale in 2038 at the time. The bonds are rated A-minus by all three major rating agencies.
After this week’s breather, investors should come to the table with an equally hearty appetite in the weeks ahead.
“We had good follow-through on retail pieces a week ago when the market was cheap, and we are getting attention with the cheaper levels generally, but not this week,” he said.