Current valuations in the municipal market became slightly more uncertain Monday as tax-exempts failed to gain amid a sharp sell-off in equities and a broader flight to safe-haven assets.
But traders said it wasn’t a day of learning, as little issuance came to market and activity was slow.
“The market was in a holding pattern today,” said a trader in New York, who described high-grade bond prices as unchanged. “There were just too many other things flying around.”
Yields across the tax-exempt curve were steady, according to Municipal Market Data’s triple-A scale.
Monday marked the third session in which bonds have failed to rally — on Thursday, yields even rose as much as five basis points. The pause follows a 27-day trend of steady or rising prices that pushed the 10-year muni yield down as much as 68 basis points from April 11.
“The whipsaw trading of last Thursday and halt to the month-long muni rally caused a lot of concern,” Randy Smolik wrote in MMD’s daily commentary. “Some participants talk of a market that could see a healthy back-off.”
The two-year note held at 0.44%, the 10-year note closed at 2.64%, and the 30-year remained at 4.31%.
Market participants said some retail buyers are balking at rich prices or stepping out towards higher yields, but paper nonetheless is receiving a lot of bids.
“I’m seeing some resistance from retail buyers at these yields, but they are still firm — most likely in sympathy with a stronger Treasury market,” a trader in Florida said. “Higher-yielding paper is a bit weaker, probably in sympathy with the stock market.”
Some of that weakness showed up in the primary market as JPMorgan cheapened a second retail period for $490 million of Massachusetts general obligation bonds, rated Aa1 by Moody’s Investors Service, AA-plus by Fitch Ratings, and AA by Standard & Poor’s. Yields ranged from 0.52% in 2013 to 3.54% in 2025, up to three basis points higher than in Friday’s pricing.
The higher yields contrasted with the Treasury market, where rates firmed to intraday calendar-year lows before paring those gains and finishing just modestly stronger. The morning gains were initiated by weak manufacturing data in China and renewed debt concerns in Europe. Fitch’s three-notch downgrade of Greece to junk status late Friday was one factor, and it was reinforced by Standard & Poor’s revising its outlook on Italy’s A-plus rating to negative from stable.
The 10-year Treasury yield traded as low as 3.094% before settling at 3.13%, two basis points lower than Friday’s finish. The two-year note began the day at 0.49% but shed all its gains in late trading and closed at 0.52%, a basis point higher than Friday. The 30-year bond yield fell three basis points to 4.27%.
Despite the limited impact Monday, the strength in Treasuries does help munis look more attractive: the 10-year muni-Treasury ratio ticked up to 84.6%, its highest since May 10.
Another factor favoring tax-exempts: issuance is anticipated at a four-week low this week. The Bond Buyer expects just $2.95 billion of new product versus $3.90 billion last week. And The Bond Buyer’s 30-day visible supply is currently at just $5.99 billion.
But most traders are uncertain whether the rally can keep going, according to Friday’s weekly survey from MMD. Just less than one-fifth of traders had a bullish outlook for the next one to two months, while 55% had a neutral outlook and 27% were bears. Among portfolio managers, 33% were bullish, 23% were bearish, and 44% were neutral. Market commentary, however, tends to remain upbeat.
“The underlying themes that have supported this municipal rally are still intact,” analysts at Piper Jaffray wrote in a research note published Monday. “The primary calendar is still light; June and July are large reinvestment months for municipals and the bullish technical trend in Treasuries, while being tested on Thursday, is still in 'buy’ mode.”
George Friedlander and Vikram Rai, strategists at Citi, were also confident in current prices and view the recent pause as “little more than a needed respite.”
“There is sufficient support to keep muni yields at or near current levels,” they wrote in a note published Friday, adding that yields continue to drop further where issuers have heavy impending bond calls and light supply.
Citi projects that by June, the market will have seen less than $100 billion of issuance, compared with $205 billion in the first half of 2010. Given this light supply, they don’t see why muni yields would move sharply higher in the near-term.
Several bond funds appear to agree. The iShares S&P National AMT-Free Bond Fund, an exchange-traded fund with $2.08 billion in assets, rose 0.27% Monday to $103.32. Just before the sharp sell-off in early November, its net asset value was $105.33.
The Market Vectors Short Municipal Index ETF, a $95 million fund made up of one- to six-year investment-grade tax-exempts, also rose 0.13% to $17.50.
Elsewhere in the new issue market, Southwest Securities priced $45.8 million of variable-rate unlimited-tax refunding bonds for the Northside Independent School District in Bexar County, Texas. Underlying ratings are double-A plus, and a credit enhancement from the state’s Permanent School Fund gives them triple-A status. The bonds were issued with a “soft” put structure.
“The issuer of the bonds is solely responsible for the take-out of the bonds on the mandatory tender (put) date,” the pricing wire said. “If the issuer is unable to do this on the tender date, the bonds will then go to a 'stepped rate.’ In this case, we will use 7.50% as the stepped rate on the bonds. Investors will then receive this rate until the issuer is able to take the bonds out with cash, a new issuance of similar bonds, for a fixed-rate deal.”
The bonds mature in 2034, offer a yield of 0.95%, and have a mandatory put date on Aug. 1, 2013.
