The tax-exempt market climbed Monday, following Treasuries, as European economic worries forced the risk-off trade.
Yields on the intermediate and long end of the curve fell to new record lows, even after yields on the long end set new records almost every day last week. The risk-off trade, combined with a supply and demand imbalance in the tax-exempt market, has pushed munis into a 21 consecutive trading streak of closing steady or firmer.
Muni traders agree that as yields approach record lows, the secondary market shows signs of slowing. “It’s quiet here today,” a New York trader said. “The day is dragging big time.”
Another trader agreed. “It’s very quiet,” a second New York trader said. “People don’t know what to do. It’s very boring.”
Munis finished stronger Monday, according to the Municipal Market Data scale. Yields inside two years were steady while the three- to five-year yields fell two basis points. Outside six years, yields plunged four and five basis points.
On Monday, the two-year closed at 0.31% for the sixth consecutive trading session. The 10-year yield dropped five basis points to 1.65%, setting a new record low as recorded by MMD. It beat its previous record of 1.67% set Jan. 18. The 30-year yield also plunged five basis points to set a new record low yield of 2.81%, beating the previous record of 2.86% set Friday.
By finishing stronger Monday, munis extended the streak of trading flat or firmer into 21 consecutive sessions. Since this most recent rally began on June 22, yields on the 10-year have fallen 21 basis points while the 30-year yield has plunged 35 basis points.
Treasuries jumped Monday on European woes, but yields closed higher after setting record lows in the morning. The benchmark 10-year yield closed down two basis points to 1.44% while the 30-year yield finished down three basis points to 2.52%. The two-year was steady at 0.22%.
In the primary muni market Monday, Bank of America Merrill Lynch priced $155.1 million of Texas’ Fort Bend Grand Parkway Toll Road Authority limited contract tax and subordinate lien toll road revenue bonds, rated Aa1 by Moody’s Investors Service and AA-plus by Fitch Ratings.
Yields ranged from 1.87% with a 5% coupon in 2021 to 3.90% with a 4% coupon in 2046. The bonds are callable at par in 2022.
In the secondary, trades compiled by data provider Markit showed firming. Yields on Northern California Tobacco Securitization Authority 5.5s of 2045 plunged six basis points to 7.07% while Ohio’s Buckeye Tobacco Settlement Financing Authority 5.875s of 2030 fell two basis points to 7.75%.
Yields on Austin, Texas, Water and Wastewater System 5s of 2023 dropped four basis points to 2.14% while Tidehaven, Texas, Independent School District 3s of 2029 fell three basis points to 3.02%.
Yields on California Public Works Board 5s of 2031 fell three basis points to 3.39% while Milwaukee 5s of 2025 and New York City 5s of 2029 fell one basis point each to 2.36% and 2.73%, respectively.
Since the latest muni rally kicked off 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 jumped to 117.5% on Monday from 105.3% on June 22. The 10-year ratio increased to 114.6% from 111.4%.
Since the beginning of the year, ratios have risen as munis underperformed Treasuries and have become comparatively cheaper. The five-year ratio started the year at 98.9% while the 10-year ratio began the year at 96.4%.
Ratios on the long end fell as munis outperformed their taxable counterparts. The 30-year ratio fell to 111.5% on Monday from 114.9% on June 22. That trend has continued throughout the year as the 30-year ratio started off the year at 119.4%.
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 261 basis points on Monday from 296 basis points since the most recent muni rally started. It has flattened more dramatically since 332 basis points at the beginning of the year. The one- to 10-year slope flattened to 145 basis points from 166 basis points on June 22 and 163 basis points on Jan. 3.
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 62 basis points on Monday from 66 basis points on June 22 and from 82 basis points at the beginning of 2012. The 30-year spread narrowed to 72 basis points, down from 80 basis points on June 22 and from 89 basis points on Jan. 3.
To be sure, the 10-year spread widened to 83 basis points on Monday from 82 basis points on June 22, but has come in since the beginning of the year when it started at 96 basis points.
In other muni bond news, recent bankruptcies and defaults have added to default total numbers for 2012, but still remain a relatively low portion of the overall market. According to data from Standard & Poor’s Dow Jones Indexes, outstanding defaults based on par value as measured by the S&P Municipal Bond Index rose to 0.62%, or over $8.4 billion, at the end of June. It is up from December 2011 of 0.50% and the March 2012 level of 0.58%. The index tracks $1.35 trillion in muni bonds.
Financial troubles in Mammoth Lakes, Stockton, San Bernardino, and other municipalities are putting pressure on the performance of California bonds, said J.R. Rieger, vice president of fixed income indexes, at S&P Dow Jones Indexes. “Year to date, munis issued within the state continue to outperform the overall municipal bond market but they have been anchored so far this month and have not moved with the overall market.”
He added the S&P National AMT-Free Municipal Bond Index has improved by six basis points this point while the California-specific index only moved up two basis points. Similarly, the New York-specific index increased positively by 16 basis points.
