The tax-exempt market ended on a steady tone Monday as market participants waited for primary issuance to provide direction.
Throughout the day, traders noted the market felt firmer, but there wasn't enough confidence behind trades to really move the market in any direction. Similarly, with few economic indicators in the early part of the week, munis will trade mostly on supply and demand patterns.
"Munis are higher," a New York trader said. "But there is not much conviction. There is not much going on."
In morning trading, yields appeared steady. "Yields are probably unchanged, or maybe have moved a basis point in either direction," a second trader in New York said. "It's a Monday in August; I haven't seen much direction."
In the primary, JPMorgan priced for retail $522.9 million of New York State Thruway Authority personal income tax revenue bonds. The bonds are rated AAA by Standard & Poor's and AA by Fitch Ratings. Institutional pricing is expected Tuesday.
Yields ranged from 0.52% with 2% and 4% coupons in a split 2015 maturity to 3.03% with a 5% coupon in 2032. Bonds maturing in 2013, 2014, and between 2024 and 2031 were not offered for retail. The bonds are callable at par in 2021 except for credits maturing in 2022.
JPMorgan also priced $118.8 million of King County, Wash., sewer bonds.
Yields on the first series, $65.4 million of sewer revenue refunding bonds, ranged from 1.18% with a 3% coupon in 2018 to 3.50% with a 3.375% coupon and 3.10% with a 5% coupon in a split 2033 maturity. The bonds are callable at par in 2022. The credit is rated Aa2 by Moody's and AA-plus by Standard & Poor's.
Yields on the second series, $53.4 million of limited tax general obligation refunding bonds, ranged from 2.86% with a 5% coupon in 2030 to 3.10% with a 5% coupon in 2034. The bonds are callable at par in 2022. The credit is rated Aa1 by Moody's and AAA by Standard & Poor's.
On Monday, the 10-year Municipal Market Data yield finished steady at 1.87% for the fourth consecutive trading session while the 30-year closed flat at 3.01% for the third session. The two-year closed at 0.29% for the 18th straight session.
Treasuries were mostly flat on Monday. The two-year and benchmark 10-year were steady at 0.29% and 1.82%. The 30-year yield fell one basis point to 2.93%.
In the secondary market, trades compiled by data provider Markit showed a mix of stronger and weaker trades.
Yields on Massachusetts 5.25s of 2021 and Ohio's Buckeye Tobacco Settlement Financing Authority 5.125s of 2024 jumped four basis points each to 1.96% and 7.14%, respectively. Yields on Puerto Rico Commonwealth Aqueduct and Sewer Authority 5.25s of 2042 and Norfolk, Va., Economic Development Authority 5s of 2043 rose two basis points each to 5.18% and 3.63%.
Other trades were firmer. Yields on Pearland, Texas, Independent School District 5s of 2027 fell three basis points to 2.42%. Yields on Wisconsin 5s of 2021 and New Mexico 5s of 2022 dropped two basis points each to 2.01% and 2.10%, respectively.
So far in August, muni exchange-traded funds have showed suffered. The iShares S&P National AMT-Free Municipal Bond ETF - ticker MUB - fell 1.05% so far this month. The SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF - ticker SHM - dropped 0.12%. The PowerShares Insured National Muni Bond ETF - ticker PZA - fell 1.01% since the start of August.
Other popular ETFs, including the Market Vectors High Yield Municipal Index ETF - ticker HYD - fell 0.49% while the Market Vectors Long Municipal Index ETF - ticker MLN - fell 1.04%.
Despite the drops, the muni ETFs outperformed the ProShares Ultra Seven to 10 Year Treasury ETF - ticker UST - which plummeted 4.16% this month.
Most muni ETFs had mixed performance compared to corporate bond ETFs. The iShares iBoxx High Yield Corporate Bond ETF - ticker HYG - fell only 0.05%, but the iShares iBoxx Investment Grade Corporate Bond Fund ETF - ticker LQD - fell 2.04%.
In August, muni-to-Treasury ratios fell as munis outperformed Treasuries and became comparatively more expensive. The five-year ratio fell to 86.3% from 101.6% at the beginning of the month. The 10-year ratio dropped to 102.7% on Monday from 108.5%. The 30-year ratio dropped to 102.7% from 109.6%.
Looking ahead to economic indicators later this week, the Federal Open Market Committee minutes will be released, which will impact the bond market.
"I don't expect anything new in the minutes although they will be closely scrutinized," said Brian Rehling, chief fixed income strategist at Wells Fargo Advisors. "One of the problems is the data has gotten favorable since they actually had the meeting. So it is possible the minutes could take a more gloomy tone on the economy than we are currently seeing given the timing of the meeting."
Rehling added that when the Fed had the meeting, it seemed like the market was on a path to set up QE3 in September. "So we may seem some verbiage or a changed word here or there that continues down that path. But expectations have changed over last few weeks as data has gotten better."
He added the bond markets have priced in that QE3 may not happen. "I think it's clear that over the last couple weeks the 10-year has backed up quite a bit. And the market is repricing expectations." Indeed, the 10-year yield has jumped from below 1.50% to above 1.80% in just a few weeks.
If QE3 does not happen in September, the next date to watch is December. "It depends on the economy and if the economic numbers are on a positive path. But if unemployment doesn't improve and economic indicators fall through, QE3 could come back in December."
Still for the meantime, Rehling said the market will take a wait and see attitude as it's a quiet week and heavy vacation season for Wall Street.
And after the FOMC minutes are released this week, economists will have their eye on the Fed's Jackson Hole, Wyo., meeting. "If there is QE3 in September, the Fed will probably begin signaling it in Jackson Hole," Rehling said. "But those odds have decreased and market has priced in the odds that is has decreased."
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