Yields Still Rising, Though Week Starts Off Slow

Yields in the municipal market continued rising for the ninth consecutive session Monday, despite a quiet start to what should be a light week of new-issue ­volume.

“There’s no true demand out there looking for bonds,” said a trader in San Francisco. “Otherwise we’d be going the other way towards lower yields, at least in some sectors. But those investors just aren’t there.”

Municipal bond yields rose one or two basis points on all maturities six years and out, while short-term yields were flat, according to the Municipal Market Data triple-A scale.

The 10-year muni rose two basis points Monday to 3.09%, the highest borrowing cost since Feb. 22, while the 30-year muni rose two basis points to 4.75%.

“It’s pretty slow; there’s a lack of liquidity but no real issuance to push it down,” the trader added. “Some guys that put their bonds out for the bid today didn’t get what they wanted relative to the generic scales. The bonds just didn’t trade.”

Only $1.8 billion is expected to hit the market this week, which is the lightest week of volume since the start of the year and the second lowest since late 2008.

“It’s probably a godsend that they’re not bringing new issues into the market right now, because if they were, we’d obviously be weaker than we are right now,” a trader in New York said.

He noted the few deals that are hitting the market are having a difficult time ­getting done.

The modest pressure on yields Monday follows a rough period last week when a broader flight to quality went into reverse and the muni market was struck by selling pressure. MMD’s benchmark 10-year yield rose 17 basis points from a four-month low on March 16 to 3.07% on Friday.

The two-year yield closed the week at 0.63%, the highest since the March 11 earthquake in Japan, while the 30-year bond finished at 4.73%.

This rise in yields occurred despite a relative lack of issuance in the market. Last week saw the most munis get sold in more than a month, as $4.7 billion entered the market.

But new volume in 2011 has averaged roughly $3 billion a week, versus about $8 billion per week in 2010.

Piper Jaffray & Co. analysts said dealers are taking low risks as the first quarter comes to a close, while buyers are creating selling pressure by unloading assets to raise cash and pay taxes. Both factors will keep the market quiet and illiquid over the coming week.

“Going into April is generally a negative time for the market, technically,” the San Francisco trader added. “If you were to bring any supply into the market, you’d expect rates to rise to attract retail investors.”

The Bond Buyer’s 30-day visible supply, which measures municipal debt to be sold over the next 30 days, is just $6.33 billion, indicating there is no surge of issuance on the near-term horizon.

Treasuries played a guiding role in pushing municipal yields upwards last week, but on Monday Treasuries actually firmed while muni yields rose.

The two markets tend to move in tandem over time, but munis often lag the more liquid Treasury market.

The benchmark 10-year Treasury yield firmed by three basis points to 3.45% Monday, while the two-year note firmed one basis point to 0.78% and the 30-year bond yield firmed two basis points to 4.51%

Demand for short-term municipal paper continues be strong. The two-year muni offered 81.8% of comparable Treasuries on Monday, indicating they were particularly rich compared to the 30-year muni, which offered 105.8% of comparable ­Treasuries.

“If people are buying munis, they are staying very conservative and buying short,” the trader in San Francisco said. “That’s the area that’s getting really rich versus taxable investments.”

George Friedlander, municipal strategist at Citi, said in a research note published Friday that the market “continues to face an uneasy balance, with limited new-issue supply offset by weak household sector demand.”

Friedlander said a growing calendar will offer better price discovery but will also test demand on the long end of the curve.

The New York trader said longer-term bonds will struggle to find buyers for one simple reason: the risk of long-term interest rates spiking, a risk he called the “the greatest fear in the market.”

“There’s an aversion to putting money out there because eventually we are going to get higher interest rates,” he said. “Retail buyers are concerned about quality, but also they aren’t seeing the kind of return that’s going to entice them out there. Eventually this market is going to need retail.”

In the competitive new-issue calendar Monday, the Waterloo Community School District in Iowa sold $52.8 million of infrastructure sales, services, and use tax revenue bonds. The deal, rated A by Standard & Poor’s, offered yields between 1.50% maturing in 2012 to 5.30% maturing in 2030. Wells Fargo was the winning bidder.

In Monday’s economic data, personal income rose 0.3% in February while spending jumped 0.7%, according the Commerce Department.

“With income growth accelerating, consumers are more able to withstand higher gas prices,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “This corroborates our view that consumers are at least partly accepting higher prices from the wholesale sector, which will lead to higher consumer inflation in the relatively near term.”

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