Municipals decline but outperform weak Treasuries; this week's supply could top $6 billion

By Sheri Kasprzak

New York, June 2 - Municipals closed out the day on a weaker note Monday as Treasuries declined ahead of the European Central Bank's meeting this week, market sources said.

Despite the weaker tone, with yields seen higher by 3 basis points to 4 bps, municipals still outperformed Treasuries, which anticipate a lot of volatility ahead.

With the ECB meeting coming up and a rate hike anticipated, as well as unemployment numbers looming, Treasuries took a dive during the session. The five-year note yield rose by 6 bps to close the day at 1.6%, and the 10-year note yield climbed by 7 bps to end at 2.54%. The 30-year bond yield rose by 5 bps to 3.38%.

New issuance could improve

Almost $6 billion of new offerings are expected to come to market this week, insiders reported, a slight improvement over the recent $5 billion weekly pace.

Although issuance has been relatively low with a decline expected in yearly volume, funding costs are low, and if rates continue to fall, the new issue calendar could build at a quicker pace than it has in recent months, said Tom Kozlik, municipal credit analyst with Janney Montgomery Scott LLC.

Investor demand remains strong, said Kozlik, with the Investment Company Institute reporting $798 million of flows into municipal bond mutual funds for the week ended May 21, representing about 20% of total flows into and out of all mutual funds for the week.

"The investor community has also shrugged off a collection of negative credit trends, and fund flows have remained positive all the while," Kozlik said.

"We believe the negative trends most prominent are recent developments in Puerto Rico and Illinois, state revenues that are not increasing as quickly as in recent quarters ... and we are still seeing several local governments not dealing well with post-Recession period from a budgetary perspective, and they are still at risk of being downgraded, in some cases again.

"We advise investors to remain conscious of the underlying credit situation and understand the drivers that could affect holdings."

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