Analyzing The Historic Market Selloff
June 28, 2013 1:13 PM
Prompted by weeks of outflows from municipal bond funds and spooked from the Federal Reserve hinting it could start tapering its bond purchasing program, the municipal bond market experienced its biggest three-day selloff in a quarter century.
Outflows from Bond Funds
In the several weeks leading up to the massive selloff, investors had already pulled over $3 billion from municipal bond mutual funds that report weekly. According to Lipper, investors pulled $156.9 million for the week ending May 29, $1.47 billion in the week ending June 5, and another $1.61 billion in the week ending June 12. In the week ending June 19, investors withdrew an additional $2.22 billion. Related article:
The Taper Tantrum
On Wednesday, June 19, Federal Reserve Chairman Ben Bernanke said the Fed could moderate the monthly pace of purchases later this year" and could end by the middle of 2014. The Fed is currently buying $85 billion a month of Treasuries and mortgage-backed securities. Related article:
The Fallout Begins
By Thursday, June 20, yields on the Municipal Market Data and Municipal Market Advisors scales had already risen 20 basis points, the first of a three-day selloff that set records. 40-day price losses through Thursday were among the steepest since 1994, according to MMA data. Some of the weeks largest deals including $800 million from the California Health Facilities Financing Authority, $350 million for the New York Metropolitan Transportation Authority, and a $250 million offering from Californias City of Hope were postponed due to market conditions. Related article:
Muni to Treasury Ratios
Following a 50-basis-point selloff for the week ending June 21, muni-to-Treasury ratios move up above 100% on the longest maturities. The 10-year Municipal Market Data scale finished the week at 104.8% and the 15-year ratio increased to 109.2%. The 30-year ratio ended the week at 110.9%. Related article:
Supply Adds Additional Pressure To Selloff
On Monday, June 24, the municipal market opened the week with a third day of massive selling. Adding gasoline to the fire, supply was expected to top $10 billion the most in two months. By the end of the day, Georgia had announced it delayed its $157 million advance refunding auction and RBC postponed the $129 million Pennsylvania Housing Finance Agency deal. Despite a mid-week rally, issuance ended at only $6.6 billion.
Bond Buyer Indexes Break Records
On Monday, June 24, The Bond Buyers Municipal Bond Index of 108-10 was the lowest since May 3, 2011, when it was 108-03. The average yield to maturity of 5.19% was the highest since July 29, 2011, when it was 5.24%. The index dropped 12-31/32 in the previous five business days from 121-09 to 108-10, the single largest one-week decline in the index since it began in 1984. The previous record was 10-29/32 during Oct. 6-14, 2008, when the index fell from 101-03 to 90-07. The percentage decline in the index over the five prior business days of 10.684% is also the largest on record. The previous record was Oct. 6-14, 2008, when the index declined 10.682%. Related article:
Three-Day Selloff Worst In Quarter Century
By Tuesday, June 25, the Municipal Market Data and Municipal Market Advisors 10-year yields had jumped to their highest levels since May 2011, while 30-year yields rose to the highest since August 2011. MMA said the 60-basis-point jump in the three-day selloff was the worst over such a time frame since April 1987. The cheapening of munis pushed muni-to-Treasury ratios over 100% across the curve. Related article:
Trading Activity Sets New Record
An all-time record 11,590 municipal bond trades with a par value of more than half a billion dollars traded Tuesday on the BondDesk ATS. While Bid Wanteds on our platform are nearing historic high levels above 10,000 per day, a sign of major selling pressure, there were almost five investor buys for every sale by investors this past week, indicating that retail investors are jumping into the market to take advantage of higher rates, said John Bagley, president of BondDesk Trading. Related article:
Liquidity Returns As Buyers Emerge
A rapid plunge in prices made municipal bonds look cheap as the week progressed. By Wednesday, buyers emerged in the primary and secondary markets and munis rallied, pushing yields back down 20 basis points. Illinois tapped the primary market with $1.3 billion of general obligation bonds. The underwriter was able to lower yields by about 15 basis points at repricing to take advantage of demand, but spreads to the MMD scale were still wider than recent Illinois GO pricings. Related article:
