The tax-exempt market had a tough time snapping out of weekend mode on Monday as trading activity was slow and munis ended the day flat.
Market participants said the lack of primary issuance, combined with typically quiet August summer days, allowed munis to take a backseat for the day.
“It’s slow, a New York trader said. “And unchanged.”
Other traders agreed that until the majority of the new issues hit the market to provide direction, activity will remain slow. “Munis are dead,” a New York trader said. “It’s August.”
Munis finished steady Monday, according to the Municipal Market Data scale. The 10-year yield finished at 1.71% for the second session, 11 basis points above its record low of 1.60% set July 26. The 30-year yield closed at 2.87% for the second session, eight basis points off its record low yield of 2.79% set July 25. The two-year was steady at 0.29% for the eighth consecutive session.
Treasuries finished mostly flat after giving up morning gains. The benchmark 10-year yield fell one basis point to 1.56%. The two-year and 30-year yields were steady at 0.25% and 2.65%, respectively.
In the primary market, Bank of America Merrill Lynch priced its first of a two-day retail order period of $850 million of New York City Transitional Finance Authority future tax-secured bonds and subordinate bonds, rated Aa1 by Moody’s Investors Service and AAA by Standard & Poor’s and Fitch Ratings.
Yields on the first series, $100 million of subordinate bonds, ranged from 0.48% with 2% and 4% coupons in a split 2015 maturity to 2.46% with a 2.5% coupon in 2026. Credits maturing in 2014 were offered via sealed bid. The bonds are callable at par in 2022.
Yields on the second series, $750 million of future tax-secured subordinate bonds, ranged from 0.53% with a 5% coupon in 2015 to 3% priced at par in 2032. Bonds maturing in 2013 and 2014 were offered via sealed bid. Credits maturing between 2024 and 2027 and between 2029 and 2031 were not offered for retail. The bonds are callable at par in 2022.
In the secondary market, trades compiled by data provider Markit showed a mix of firming and weakening.
Yields on Ohio’s Buckeye Tobacco Settlement Financing Authority 5.875s of 2047 plunged five basis points to 7.36% while Florida’s Jacksonville Electric Authority 3.625s of 2035 dropped three basis points to 3.78%.
Other trades were weaker. Yields on Philadelphia Water Department 5s of 2040 jumped seven basis points to 3.34% while North East, Texas, Independent School District 5s of 2020 increased four basis points to 1.60%. Yields on Fairfax County, Va., 4.5s of 2038 rose three basis points to 2.92%.
So far this year, muni-to-Treasury ratios have risen as munis underperformed their taxable counterparts and became comparatively cheaper. The five-year muni yield to Treasury yield ratio rose to 103.1% on Monday from 98.9% at the beginning of the year. The 10-year ratio jumped to 109.6% from 96.4% on Jan. 3.
Ratios on the long end fell as munis outperformed their Treasury counterparts and became more expensive. The 30-year ratio dropped to 108.3% from 119.4% at the start of 2012.
The slope of the yield curve has flattened dramatically since the beginning of the year as investors move further out in duration in search for yield. The one- to 30-year slope of the curve flattened to 268 basis points on Monday from 332 basis points on Jan. 3. The one- to 10-year slope of the curve flattened to 152 basis points from 163 basis points at the beginning of the year.
Credit spreads have also compressed throughout the year as investors move down the credit scale in search for additional yield. The five-year triple-A to single-A spread compressed to 61 basis points on Monday from 82 basis points on Jan. 3. The 10-year triple-A to single-A spread came in to 80 basis points from 96 basis points at the start of the year. The 30-year spread compressed to 72 basis points from 89 basis points at the beginning of the year.
And while the slope of the yield curve and credit spreads show that demand for munis still exists, muni exchange-traded funds also showed positive numbers. The iShares S&P National AMT-Free Municipal Bond ETF — ticker MUB — rose 3.14% so far this year. The SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF — ticker SHM — increased 0.53%. The PowerShares Insured National Muni Bond ETF — ticker PZA — rose 5.15% since the start of 2012.
But muni ETFs failed to keep up with the ProShares Ultra Seven to 10 Year Treasury ETF — ticker UST — which rose 7.69% this year.
Muni ETFs came in mixed compared to corporate bond ETFs. The iShares iBoxx High Yield Corporate Bond ETF — ticker HYG — rose only 2.47% so far this year, but the iShares IBoxx Investment Grade Corporate Bond Fund ETF — ticker LQD — jumped 6.11%.
Peter DeGroot, a muni strategist at JPMorgan noted that whipsaw movements in Treasury yields won’t necessarily translate over into movement in muni yields, and that muni activity could remain relatively muted compared to activity in the Treasury market.
“Municipal yield movements remain more resistant to Treasury market volatility as rates are too low to rally significantly when Treasury yields fall and technicals limit the degree to which municipal yields rise when Treasury yields spike,” wrote DeGroot.
However during these summer months, he added municipal volatility could increase in some cases. “Additional factors impacting municipal volatility are thinner trading volume heading into the peak summer vacation schedule and sizable capital inflows,” he added. “Thinner transaction volume may exacerbate municipal volatility over the next month however.”
Looking to the rest of the primary market this week, DeGroot says it should be received well. “The mix of offerings should be very well received as yield hungry buyers will have access to a mix of credit oriented and Alternative Minimum Tax bonds.”
