Worries about financial problems in Greece and China caused volatility in the U.S. municipal bond market during the past week.
A flight-to-quality move pushed up prices of U.S. Treasury bonds early in the week, boosting muni bond prices. In the first three trading sessions, yields on top-shelf municipal bonds fell by about 13 basis points.
In Asia, Chinese stocks melted down and then staged a late week rebound after Chinese securities regulators stepped in and implemented measures such as banning some share selling for 6 months and easing margin requirements. Almost half of the companies listed had to suspend trading. Since June, Chinese equities have lost almost 30% of their value and one reason is that China's economic growth so far this year has been the weakest since 2009.
Meanwhile in Europe, attention was riveted on Greece as it found itself between the Scylla and Charybdis of borrowing and austerity. Prime Minister Alexis Seeprass delivered a spending cut plan to European leaders to bolster his government's request for a new bailout loan. European leaders are meeting to decide their response while the Greek government extended bank closures through Monday.
Closer to home, minutes from the U.S. Federal Reserve's June meeting hinted that officials think the economy is improving enough to support an interest rate hike. But the FOMC said it was concerned about risks from China and Greece, which have only gotten worse since their June meeting.
And on Friday, Fed Chair Janet Yellen said the Fed is on track to raise rates later this year.
"My own outlook for the economy and inflation is broadly consistent with the central tendency of the projections submitted by FOMC participants at the time of our June meeting," she said. "Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy."
Yellen, however, expressed some concerns about the strength of the labor market.
"But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step," she added.
Also roiling the markets was a computer problem that shut down trading on the New York Stock Exchange for most of Wednesday.
By the end of the week, though, calm had returned, and muni yields jumped back up in the last two trading sessions, near the prior week's levels.
On Friday, the yield on the 10-year benchmark muni general obligation finished up seven basis points to 2.32% from 2.25% on Thursday, while the yield on the 30-year GO rose seven basis points to 3.31% from 3.24%, according to the final read of Municipal Market Data's triple-A scale. In the previous week, the yield on the 10-year muni stood at 2.32% while the 30-year yield was at 3.33%.
In contrast, at the beginning of 2015, the yield on the 10-year muni stood at 2.01% while the 30-year yield was at 2.83%. While muni yields have been slowing rising during the year, they are still below their historical levels. At the beginning of 2014, the 10-year yield was at 2.79% and the 30-year was at 4.20%.
Treasury prices were also lower on Friday, with the yield on the two-year Treasury note rising to 0.65% from 0.58% on Thursday, while the 10-year yield rose to 2.42% from 2.29% and the 30-year yield increased to 3.20% from 3.10%.
The 10-year muni to Treasury ratio was calculated on Friday at 96.0% versus 97.8% on Thursday, while the 30-year muni to Treasury ratio stood at 103.2% compared to 104.6%, according to MMD.
Primary Market
There was a lot of action in the primary during the week. The biggest sale was the North Carolina Municipal Power Agency No. 1's $455.89 million of Series 2015 A and B refunding bonds, Series 2015 C bonds and Series 2015E forward delivery refunding bonds. Morgan Stanley priced the bonds, which were rated A by Standard & Poor's and Fitch Ratings.
BAML priced the Illinois State Toll Highway Authority's $400 million of Series 2015A toll highway senior revenue bonds. The bonds were rated Aa3 by Moody's Investors Service and AA-minus by S&P and Fitch.
Proceeds from the sale will partially fund the Illinois Tollway's 15-year, $12 billion capital program, "Move Illinois: The Illinois Tollway Driving the Future," which is expected to improve mobility, relieve congestion, reduce pollution, create jobs and link economies across the Midwest. Of the $12 billion needed, $5 billion will come from revenue bond issuance with the rest being funded with pay-as-you-go revenues.
"This funding for Move Illinois projects supports the hard-working men and women providing construction and engineering services," Illinois Tollway Director James Sweeney said in a press release. "The Illinois Tollway is continuing to invest in our state's infrastructure and its people, supporting nearly 26,000 jobs in the region in the first four years of the Move Illinois program."
Municipal Bond Funds See $306M Cash Outflow
For the 10th week in a row, municipal bond funds reported cash outflows. The weekly reporting funds saw $305.707 million of outflows in the week ended July 8, after experiencing outflows of $1.199 billion in the previous week, according to the latest Lipper data. This brought to 13 out of 28 weeks this year the funds have seen cash withdrawals.
The four-week moving average remained negative at $507.779 million after being in the red at $534.292 million in the previous week. The moving average has been negative for seven straight weeks. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.
Long-term muni bond funds also experienced outflows, losing $147.939 million in the latest week, after seeing outflows of $898.989 million in the previous week. High-yield muni funds saw an outflow of $122.823 million in the latest reporting week, after seeing an outflow of $492.213 million the previous week. Exchange traded funds saw outflows of $27.250 million, after experiencing inflows of $4.966 million in the previous week.
However, intermediate-term funds recorded inflows of $53.613 million after seeing outflows of $32.082 million in the prior week.
The Week's Most Actively Quoted Issues
Puerto Rico and New York were some of the most actively quoted names in the week ended July 10, according to data released by Markit.
On the bid side, the Puerto Rico commonwealth GO 8s of 2035 were quoted by 17 unique dealers. On the ask side, New York City Transitional Finance Authority building aid revenue bonds 5s of 2035 were quoted by 12 dealers. And among two-sided quotes, the Puerto Rico commonwealth GO 8s of 2035 were quoted by 22 dealers, Markit said.
The Week's Most Actively Traded Issues
Some of the most actively traded issues in the week ended July 10 were in Puerto Rico, Texas and Oregon.
In the revenue bond sector, the Corpus Christi utility systems 4 1/8s of 2045 were traded 37 times. In the GO bond sector, the Puerto Rico commonwealth 8s of 2035 were traded 86 times. And in the taxable bond sector, the Oregon Health Sciences University revenue 5s of 2045 were traded 26 times, according to Markit.
MSRB Previous Session's Activity
The Municipal Securities Rulemaking Board reported 43,033 trades on Thursday on volume of $9.927 billion. The most active bond, based on the number of trades, was the FSU Financial Assistance Inc., Fla.'s Series 2015A educational and athletic facilities improvement revenue 4 1/8s of 2040, which traded 217 times at an average price of 99.221 with an average yield of 4.17%. The bonds were initially priced at 96.571 to yield 4.35%.
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar increased $2.70 billion to $12.53 billion on Friday. The total is comprised of $2.95 billion competitive sales and $9.58 billion of negotiated deals.
