A third week of rebounding supply in municipals has only further whetted investors' appetite for tax free debt. Though the calendar has grown from summer slowness, it hasn't provided much relief for investors looking for spread, because demand has increased even more.
Once healthy supply becomes the norm rather than the exception, the supply-demand imbalance is expected ease and spreads to widen, but many more weeks of heavy issuance will be needed before that can happen, a Midwest-based trader said.
"[Weekly supply] will need to be in the $10 to $15 billion range for a long time before you start to see demand wane," said the trader.
Other traders thought it might take less for the environment to begin to turn around.
"Once you start to see $8 billion as the regular incoming supply for the week, and the 30-day visible near 15 for a month, those spreads will start to widen," said a second Midwest trader.
Hitting these metrics may take longer than traders would like. Some of the gains seen in primary volume are expected to reverse moving into the week of Oct. 6. Friday's 30-day visible supply was $8.386 billion, up $342.8 million from the day prior, according to data collected by The Bond Buyer.
Supply for the week is forecast to rise to $5.540 billion, 23% higher than this week's $4.493 billion, according to The Bond Buyer's data.
Mixed Secondary
Until supply rises consistently, spreads will continue to tighten as scales contract. The Municipal Market Data's triple-A 5% curve strengthened over the course of the week, but softened for some medium-term maturities on Friday when a light primary and secondary failed to provide directionality for yields, traders said. Yields on bonds maturing from 2015 through 2017 and 2035 through 2044 were unchanged as those maturing in 2018 and 2025 through 2034 rose one basis point, according to data provided by TM3. Bonds maturing between 2019 through 2024 rose two basis points.
No deals over $100 million priced in the competitive of negotiated markets on Friday.
The secondary market was mixed on Friday, a break in an otherwise strong week. The State of California was among the most-traded issuers of the day, with yields on its 5s of 2043 weakening two basis points to 3.41% from 3.39%, according to data provided by Markit. The State of Connecticut, another top trader, meanwhile firmed five basis points on its general obligation 5s of 2023, with yields falling to 2.21% to 2.26%, according to Markit.
Treasury Tumble
Outside forces as well, in particular the strengthening Treasury market, promise to help the muni market firm up even more.
"The market is very much dependent on geopolitical forces right now," said the first Midwest trader. "Treasuries are a huge determinant of munis, especially now."
The 10-year Treasury closed Friday evening at 2.44%, flat from Thursday, after returning to the levels seen at the beginning of September. With geopolitical tensions rising, traders said they expect Treasuries to stay in a rally for the foreseeable future with that strength to be echoed in municipals.
Yields on the 30-year Treasury dipped another two basis points, closing Friday at 3.13%, while the two-year softened five basis points to 0.58% compared to Thursday's market close.
Friday's strength was largely generated from a stronger-than-expected September jobs report, which indicated that 248,000 jobs were created last month as unemployment for the month fell to 5.9%, below economists' estimates of 6.1%.
