Market Post: Muni Yields Head Toward New Lows

The municipal bond market continued to strengthen as it headed toward setting record lows. Munis followed Treasuries higher as taxable yields also neared record lows.

"The market is starting to slow," a New York trader, adding the market is stronger but it's a Friday afternoon in the summer and traders are starting to leave the desk.

Munis were stronger Friday afternoon, according to the Municipal Market Data scale. Yields inside six years were steady while the seven- to nine-year yields fell as much as two basis points. Outside 10 years, yield dropped between one and five basis points.

On Thursday, the two-year yield closed flat at 0.31% for the fourth consecutive session. The 10-year yield finished steady at 1.73% for the fourth straight session, closing six basis points above its record low of 1.67% set Jan. 18. The 30-year yield fell one basis point to 2.90%, setting a record low as recorded by MMD. The previous record was 2.91% set Wednesday.

Thursday marked the 19th consecutive trading session where munis have traded steady or firmer. Since this most recent rally began on June 22, yields on the 10-year have fallen 13 basis points while the 30-year yield has plunged 26 basis points.

Treasuries were much stronger. The benchmark 10-year plunged seven basis points to 1.45% while the 30-year yield plummeted eight basis points to 2.54%. The two-year yield increased one basis point to 0.23%.

Since the most recent rally began on June 22, ratios have risen on the short and intermediate part of the curve as munis underperformed Treasuries. Munis rallied, but lagged the Treasury rally. The five-year muni-to-Treasury ratio rose to 114.5% on Thursday from 105.3% on June 22. The 10-year ratio increased to 113.8% from 111.4%.

Ratios on the long end fell as munis outperformed their taxable counterparts. The 30-year ratio fell to 110.7% on Thursday from 114.9% on June 22.

The slope of the yield curve has flattened since the beginning of the year and continued that trend since June 22. The one- to 30-year slope flattened to 270 basis points on Thursday from 296 basis points. The one- to 10-year slope flattened to 153 basis points from 166 basis points on June 22.

Credit spreads have compressed as investors reach down the credit scale in search for yield. The five-year triple-A to single-A spread compressed to 63 basis points on Friday from 66 basis points on June 22. The 10-year spread narrowed to 81 basis points from 82 basis points in June. The 30-year spread came in to 71 basis points, down from 80 basis points on June 22.

Looking to next week, $6.25 billion is expected to hit the primary market, down slightly from this week's revised $7.91 billion. In the negotiated market, $4.71 billion is expected, down from this week's revised $5.42 billion. On the competitive calendar, $1.54 billion is expected to be auctioned, down from this week's revised $2.49 billion.

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