Munis exercised a run-of-the-mill pattern this week as tax-exempts followed the broader rally in Treasuries at a lag.
The Bond Buyer’s 20-bond GO index of 20-year general obligation bond yields fell nine basis points this week to 4.05%, reversing a 31 basis point jump over the previous two weeks.
The Bond Buyer’s 11-bond GO index of higher-grade 20-year GO bonds descended eight basis points to 3.78%. It too had jumped 31 basis points over the previous two weeks, though in the three weeks before it fell 64 basis points to its lowest since April 1967.
Impressive as this week’s rally was, the move in Treasuries was greater. The 10-year Treasury yield dropped 15 basis points to 1.99% — its lowest since the 1950s. In overnight trading early Tuesday, it even plunged to 1.91%. And the 30-year Treasury yield finished the week 20 basis points lower at 3.31%, its lowest since Jan. 22, 2009.
Peter DeGroot, head of municipal research and strategy at JPMorgan, said muni supply is so limited these days that even a modest level of demand is enough to dissipate incoming supply.
Coupled with a massive rally in Treasuries and a summer period of high redemptions and coupon payments, and voila! — low yields across the board.
“Investors have had a large proportion of capital with which to reinvest in the muni bond space,” DeGroot said.
The Bond Buyer’s revenue bond index, which measures 30-year revenue bond yields, also dropped eight basis points to 5.07%. This is its lowest level since Nov. 10, 2010, when it was 4.87%.
The one-year note index moved down a single basis point to 0.30%, a five-week low. Its record low in data going back to 1989 was 0.28%, on July 20.
The weekly average yield to maturity on The Bond Buyer’s 40-bond muni index, which is based on prices for 40 long-term muni issues, declined five basis points this week to 5.03%, its lowest level since Nov. 10, 2010.
Despite low yields, muni-Treasury ratios remain at attractive levels, with the 10-year ratio at 105.1% and the 30-year ratio at 111.2%, according to Municipal Market Data. The long-term average for the 10-year ratio is 83%, but high ratios aren’t necessarily of much help in convincing alienated retail investors that they are getting a good deal.
“The individual investor doesn’t go and buy Treasuries all the time, so their reaction isn’t, 'Gee, this is 100% of Treasuries’ but, 'Gee, aren’t these rates low?’” said Gary Gildersleeve, fixed-income portfolio manager at Evercore Wealth Management. “So the muni-to-Treasury ratios don’t mean a heck of a lot.”
Insurance companies’ demand, too, tends to wane as yields fall, DeGroot added. “Their utilization of tax-exempts is typically for asset liability matching,” he said. “When yields fall below their projected cash payouts, their buying interest becomes more narrowly defined.”
Without much appetite from retail and receding interest from insurance companies, the primary sources of demand are now the managed money, mutual funds, and some crossover interest on Treasury rallies when value in the market becomes compelling, DeGroot said.
“Though they’ve seen recent outflows, there has been a good deal of reinvestment capital available to the market, against a backdrop of limited supply,” he said. “I would place the primary sources of demand in those three camps.”
