The municipal bond market declined Thursday for the sixth consecutive session, with the worst performance coming from bonds maturing in 10 years or less, as market participants shunned how pricey this sector has become in recent weeks.
In terms of day-to-day total returns:
- The high-grade, short-end of the curve showed a total return of negative 0.29% yesterday, according to Municipal Market Advisors (MMA) data.
- The high-grade, intermediate part of the curve showed a total return of negative 0.16% yesterday.
- The high-grade, long end of the curve showed a total return of negative 0.28% yesterday.
- The high-grade marketplace of bonds rated single-A or better is usually the most liquid when it comes to municipals, but that was not the case yesterday. Trading was sparse, but there were many large banks and money managers trying to lighten inventories ahead of the month-end evaluations. Thus, the selling pressure forced the market to cheapen. Many participants agreed that if more trading had occurred, the declines could have been worse.
- Bonds maturing in 10 years or less bore the brunt of this cheapening process, as it was this sector that led the rally at the start of February. Now, these maturities appear overpriced.
- In the non-investment grade sector, of non-rated bonds or BBB and lower, municipals got clobbered. Many lower-rated bond offerings remained out for the bid the entire session only to be sold at the very end of the day at steep concessions. It appears the bargain-hunters have disappeared for the time being.
- New issues were not overbearing yesterday, but many were forced to reprice bonds cheaper as first retail and then institutions lacked interest. Major new issues priced Thursday:
- $440 million electric and gas systems revenue bonds for San Antonio, Texas; Aa1/AA/AA+.
- *$199 million water revenue bonds for Kansas City, Mo.; Berkshire Hathaway (BRKA) insures 2015-2028; underlying: A1/AA+/NR.
As noted above, losses (and subsequent yield increases) are the highest in the 10-year sector.
Matthew Posner is a director with Municipal Market Advisors. Posner writes intraday research, data and commentary on the municipal market and heads up the firm's efforts in Washington, D.C., as an educator of policy markers on the tax-exempt securities market. Founded in 1995, MMA is the leading independent strategy, research and advisory firm in municipal bond industry.