Muni Bond Traders See Limited Liquidity

Municipal bond traders encountered limited liquidity in secondary markets Monday, though prices were generally unchanged in the transactions that did occur.

Two large new issues were offered to retail investors, which kept those looking to buy new bonds engaged. Still, most participants were sidelined.

In terms of day-to-day total returns:

• The high-grade, short end of the curve showed a total return of 0.00%, according to Municipal Market Advisors data.
• The high-grade, intermediate part of the curve showed a total return of 0.00%.
• The high-grade, long end of the curve showed a total return of positive 0.02%.

The high-grade marketplace of bonds rated double-A or better was a nonevent. Mondays tend to be slow but this was a particularly apathetic trading session. The expectation of poor performance in March is keeping many large institutional participants limited in their activity, even if it is for high-grades.

In the non-investment grade sector of non-rated bonds or triple-B and lower, securities were traded with even less frequency. Little to no price discovery was available, so anyone looking to do business in this credit sector likely decided to wait a day -- or the week.

New issue volume for the week is higher than what the market has seen so far in 2009. This could produce supply pressure that the already fragile market will not be able to tolerate well. This will be the main issue to watch this week.

The new-issue calendar started as most Mondays do with retail order periods. Underwriters are trying to distribute as many bonds as possible to high net worth individuals as institutions are not the steady buyers of munis that they were a year ago.

Of note, the University of Pittsburgh is in the market this week after two weeks of delays. Also, the New York State Environmental Facilities Corp. is in the market with personal income tax bonds, a popular and usually liquid credit. These two issuers will be ones to watch as they distribute bonds this week.