The tax-exempt market ended stronger Tuesday as yields continued to fall to new record lows.
The primary market got off to a slow start after a three-day weekend following the Veterans Day holiday, and so most traders focused on the secondary.
“The market is firm,” a Boston trader said. “The intermediate and long end is stronger by one to two basis points. There is not much movement between the 2013 and 2019 maturities.”
He added, “the new issue market is a little slow.”
Other traders agreed the muni market was firmer with attention on the secondary.
“The market is stronger at least by three basis points,” a Chicago trader said. “Maybe stronger by three to five basis points in the 10-year range.”
He added there is not enough going on in the primary Tuesday, and so all the focus is on the secondary. “It’s all secondary today. And probably primary Wednesday and Thursday.”
And with Thanksgiving cutting next week’s calendar short, traders have to buy this week. “If you’re going to buy anything, you have to buy it now because it won’t come next week. And there is an absence of paper in the secondary so you have to pay up.”
Still, one trader said morning activity was slow after the three-day weekend and with the big run-up in prices last week, the market took a pause.
“Not much is going on," a New York trader said. "It's kind of quiet. There was a big rally last week so this is probably a breather."
In the primary market Tuesday, Jefferies & Co. priced $209.8 million of Harris County, Texas, taxable and tax-exempt bonds, rated triple-A. Pricing details were not available by press time.
Goldman, Sachs & Co. priced $58.5 million of North Carolina Medical Care Commission facilities revenue refunding bonds for the Wake Forest Baptist Obligated Group, rated Aa3 by Moody’s Investors Service and AA-minus by Standard & Poor’s. Pricing information was not yet available.
On Tuesday, the Municipal Market Data scale posted gains for the sixth consecutive session and record low yields were set. The 10-year yield dropped two basis points to 1.55%, setting a new record low as recorded by MMD. The 1.55% beat the previous record of 1.57% set Friday. Before that, the record low was 1.59% set Thursday.
The 30-year MMD yield also fell two basis points to 2.64%, also setting a record low as recorded by MMD. The 2.64% beat the previous record of 2.66% set Friday and 2.69% set Thursday.
The two-year finished steady at 0.30% for the 33rd consecutive trading session.
Treasuries were stronger Tuesday. The benchmark 10-year yield fell three basis points to 1.59% while the 30-year yield dropped four basis points to 2.72%. The two-year yield fell one basis point to 0.25%.
Throughout November, muni-to-Treasury ratios have fallen as munis outperformed their taxable counterparts and became relatively more expensive.
So far this month, the 10-year muni yield to Treasury yield ratio fell to 97.5% from 100% at the beginning of November. But, it has risen from where it started the year at 96.4%.
Similarly, the 30-year ratio dropped to 96.7% from 97.2% at the beginning of November. The ratio has also fallen from 119.4% where it started the year.
Ratios in the front end of the curve have actually risen as munis underperformed Treasuries and became relatively cheaper. The five-year muni-to-Treasury ratio increased to 103.2% from 91.8% at the beginning of November and from 98.9% where it started the year.
As muni yields have hit record low yields, investors have been forced to move down the credit scale in search for yield. This month – and throughout the entire year – the triple-A to single-A spread has compressed.
The two-year spread compressed to 34 basis points on Tuesday from 56 basis points at the beginning of the year. The spread has stayed at 34 basis points throughout November. The five-year spread compressed to 53 basis points on Tuesday from 82 basis points at the beginning of the year. It has remained at 53 basis points throughout November.
The 10-year spread compressed to 69 basis points on Tuesday from 70 basis points at the beginning of the month. The spread has tightened even further from where it began the year at 96 basis points.
Similarly, the 30-year triple-A to single-A spread tightened to 67 basis points on Tuesday from 69 basis points at the beginning of November. It has further tightened from 89 basis points at the beginning of the year.
The slope of the yield curve has flattened throughout the month and the year as investors extend the duration of bonds in search for extra yield. The one- to 30-year slope of the curve flattened to 244 basis points on Tuesday from 262 basis points at the beginning of November. The slope has flattened from 332 basis points at the beginning of the year.
The 10- to 30-year slope also flattened to 109 basis points on Tuesday from 110 basis points at the beginning of the month. It has flattened significantly from where it started the year at 169 basis points.
