Municipal Market Softer Amid Uncertainty

Last week marked the worst performance for the municipal bond market since October 2011. The yield on the AAA scale for 10-year municipal bonds rose 17 basis points, versus a rise of 8.5 basis points on the 10-year Treasury bond. Several factors contributed to the weakness, including the simple fact that, before the recent increase, municipal bond yields were sitting at 47-year lows. Investor fear over potential changes to the tax exemption of municipal bond interest income has led to a short-term halt in buying interest. A spike in selling interest has put downward pressure on the market, where the par volume of bonds out for the bid was the highest it has been since January 2011, right after Meredith Whitney’s bold predictions regarding municipal defaults. Those two forces, coupled with a jump in new issue supply to $20 billion over the last two weeks, which was the highest level since July and compares with just $2.8 billion expected to price this week, have contributed to market weakness. Broker-dealers have also pulled back in a seasonal trend of trading desks reducing inventory and risk going into year-end, creating a weak market environment for municipal debt. This is a potential opportunity for our clients, if municipal bond yields approach attractive yield levels relative to Treasuries SNW stands ready to take advantage of this market dynamic.