With market participants increasingly convinced that issuance isn’t likely to pick up soon, analysts say the muni rally could continue as the market enters the reinvestment period of June and July.
“Investors are coming into coupon payments in 15 days and that’s going to be a big push, so all the technicals are still lining up,” a Los Angeles trader said Friday.
Yields fell up to three basis points Friday to mark the 24th session of stable or rising prices for tax-exempt paper. The benchmark 10-year yield fell 10 points over the past five sessions to 2.64%, its lowest since Nov. 12, 2010. Its yield has now dropped 60 basis points in a month, according to Municipal Market Data.
The two-year yield fell eight basis points in the week to 0.46%, and the 30-year yield declined six basis points to 4.37%.
A sleepy primary market is helping to drive prices higher. Year-to-date supply has tumbled 54.2% from the same period last year, according to Thomson Reuters. Just $71.74 billion entered the market as of May 13, versus $150.8 billion over that period last year.
This week’s calendar totals $4.65 billion, versus $4.27 billion last week and an average of roughly $8 billion per week in 2010.
“We believe this rally still has room to run,” Chris Mauro, research analyst at RBC Capital Markets, wrote Thursday. “Even the most reluctant of muni bears” have to admit that credit concerns have begun to diminish, he said.
Tom Doe, chief executive at Municipal Market Advisors, estimates that $50 billion and $27 billion will mature in June and July, respectively, not including coupon reinvestment. He noted that municipal prices typically improve this time of year as reinvestment money gets harvested.
MMA managing director Matt Fabian added that new supply has been low enough for there to be “ready-to-spend cash” lingering in accounts. “So it’s going to be a steady pressure richer, especially if summer supply wanes like usual.”
But he also considers the market to be overbought, making for an environment that is “extraordinarily risky” for buyers.
“The trick is not to buy into spread-tightening trades when you think the benchmark is too rich,” he said via e-mail. “It may get richer when reinvestment increases, but the trend doesn’t have to parallel normal seasonal trends, because normally, the market isn’t already so rich.”
The 10-year muni-to-Treasury ratio was 82.76% Friday, according to MMD, down from 91.6% a month ago. Its long-term average going back to 1990 is 83.35%.
Doe said recent talk from federal policymakers of ending the tax-exemption among munis may have also played a role in supporting prices recently, though he said the strategy is premature.
“Buying bonds now based on that idea alone is premature and could well be in error, from a performance aspect,” Doe said. He noted the rally has driven MMA measures of risk to elevated levels.
Further support might soon be found among municipal bond mutual funds, which have now seen outflows for 26 straight weeks, according to Lipper FMI.
Outflows in the week ending May 11 were just $95 million, a fraction of the $681 million four-week average and the smallest net outflow since mid-November.
“Muni funds appear to have benefited this past week from an investor shift out of equity funds and into fixed income,” Mauro wrote Friday, noting some individual fund families actually reported modest inflows. “This move back into munis by mutual fund investors, combined with an exceedingly light 2011 municipal new-issue calendar, should give additional momentum to the current rally in munis.”
