Yields in the municipal market declined for the ninth consecutive session Monday, as investors sought more yield than could be found in Treasuries.
“Overall, the market feels very strong,” a trader in Chicago said. “The Treasury market seems OK, and people are looking for a place where they can invest money and get a little more yield than they can there.”
Investors also have been preparing for a small boost in issuance this week, though traders still don’t see the expected uptick as significant enough to have too much of an affect on the recent firming.
Muni yields finished Monday lower, according to Municipal Market Data’s triple-A scale. Intermediate yields declined two or three basis points. Long-term maturities saw yields drop two basis points. Short-term yields were unchanged.
The benchmark 10-year muni yield reached 2.96% by the day’s end. That makes for a 31-basis point drop from 3.27% on April 11. The rally, though, is still retracing earlier losses: on March 16, its yield was as low as 2.90%.
The two-year muni yield stood at 0.60% for the fourth consecutive day. The 30-year yield settled two basis points lower at 4.70%.
Ratios to Treasuries have been falling for most of 2011, MMD numbers show. Ten-year munis look rich compared to the equivalent Treasuries, with a ratio of 87.94. For the year, they have averaged 92.36.
But as with yields, ratios are merely making up lost ground, said the Chicago trader.
“Ratios are through their average,” he said. “But we’ve been in that 80%-range for some time. We’re still crawling back after a couple years of under the bus. Yes, they’re firm, but there’s just not that much out there. And now we get scarcity effect. What is the break-even point between munis and Treasuries? So, we have some room to go there.”
Tax-exempts may be starting to take their cues from Treasuries, according to Howard Mackey, president of the broker-dealer unit of Rice Financial Products.
“There is an improvement in the markets but there is no definitive information,” he said. “Treasuries have somewhat stabilized over the past few days. The municipal market lags the Treasury market, so this adjustment positions our market to be more in line with the general trend of fixed-income rates.”
Treasury yields finished Monday lower. The two-year yield fell two basis points on the day to 0.65%. The 10-year yield dropped four basis points to finish at 3.36%, and the 30-year yield dipped three points to 4.45%.
Still, the muni market navigated Monday’s falling rates with limited trading activity and secondary offerings, Randy Smolik wrote in his daily commentary for MMD.
It’s “difficult to discern how much bullish conviction was out there,” he wrote. “Yet, a vast majority of the trading was stronger than Thursday levels and pointed to two-to-three basis point gains on average. Firmer Treasuries emboldened the muni bid to step, probing higher to find where sellers care.
“Block offerings continued to be hard to find. Sellers kept leading the MMD curve, encouraging bidders to step but the thin conditions made it difficult to determine how much bullish conviction was out there,” Smolik wrote.
The bond market may require a little more to keep its hot hand, the Chicago trader added.
“We may be at the last bit of a rally,” he said. “But without a significant rally in Treasuries, I don’t know how much farther we can go. We need something that would change the dynamic. But other than a Treasuries rally, I’m not sure what that would be.”
A new batch of issuance is coming, but market participants question whether it will be enough. Predictions for the year, once commonly above $400 billion, have plummeted. The most recent estimates range from $200 billion to $300 billion. Monday featured no significant deals.
Citi on Tuesday will price for retail investors the largest deal this week, Chicago’s $1 billion sale of third-lien revenue bonds for O’Hare International Airport to finance projects under an ongoing $8 billion runway-expansion program. The deal is scheduled for pricing for institutions on Wednesday.
“It’s going to be very well received,” said a second trader in Chicago. “Even though we’ve seen net outflows, there’s still a fair amount of cash that hasn’t been reinvested.”
Also Wednesday, Morgan Stanley will price a $353.5 million sale of revenue bonds from the Massachusetts Development Finance Agency on behalf of the Broad Institute. The bonds are rated A1 by Moody’s Investors Service and AA-minus by Standard & Poor’s. They will price with a structure that includes $269.9 million of Series A tax-exempt bonds and $83.5 million of Series B taxable revenue bonds.
The broader economic picture looks to benefit some municipalities, while most others struggle, according to a recent JPMorgan municipal analyst report.
Many observers hoped for large gains in 2011, after a steadily improving economy helped state and local governments register a 2.5% year-over-year increase in tax revenues in 2010, the report said.
“But such optimism for material revenue gains in 2011 is fading along with median economic growth forecasts, which have steadily been lowered throughout the year on a backdrop of staunch oil prices and disruptive global events such as the earthquake in Japan,” the report noted. “Some states, like Texas which has a robust oil sector, and California which levies sales tax on gasoline revenues, will navigate the world of high oil and gas prices better than others. High gas prices and steep toll fees will likely dampen traffic—and potentially revenues—on toll roads.”
