The tax-exempt market ended steady on Christmas Eve as most traders were home for the holidays, making for limited primary and secondary activity.
The Securities Industry and Financial Markets Association recommended an early close for U.S. bond markets Monday — 2 p.m. EST — and a full close on Tuesday for the Christmas holiday. The markets will reopen for a full day of trading on Wednesday.
"There is nothing going on...," a New Jersey trader said. "No one is in. When people reach out offering wise, half the people aren't in. Maybe they are working ... remotely, if that."
Trading has been steady with prices firming over the last few sessions after a dramatic backup in yields that climaxed with Lipper reporting massive municipal bond mutual fund outflows. Investors withdrew $2.3 billion from muni bond funds last week, the most since January 2011, and the fifth largest amount on record. It was the first time in eight weeks that funds saw outflows in a year where investors poured cash into bond funds.
The Municipal Market Data scale ended steady after two days of firmer trading. The 10-year yield was steady at 1.77% while the 30-year yield closed flat at 2.83%. The two-year finished flat at 0.31% for the fifth consecutive trading session.
The 10-year MMD yield remains 30 basis points above its record low of 1.47% set Nov. 28. The 30-year still trades 36 basis points above its record low of 2.47% also set Nov. 28.
Treasuries ended the holiday-shortened trading session flat on Monday. The two-year and benchmark 10-year yields were steady at 0.27% and 1.77%, respectively. The 30-year yield increased one basis point to 2.94%.
Munis cheapened somewhat during 2012 relative to Treasuries on the short and intermediate part of the curve as reflected by muni to Treasury ratios. The five-year muni yield to Treasury yield ratio jumped to 105.2% from 98.9% at the beginning of the year. For the month, the ratio is up from 101.6% on Dec. 3. The 10-year ratio rose to 100% from 96.4% at the beginning of the year. But the ratio is down overall for the month from where it started December at 111%.
It was a different story on the long end. The 30-year ratio plummeted throughout the year as long munis outperformed Treasuries and became relatively expensive. The 30-year ratio fell to 96.3% from 119.4% at the beginning of the year. It is up slightly for the month from where it started at 88.3% on Dec. 3.
Throughout the year, the slope of the yield curve has flattened dramatically — despite the recent selloff — as yields plummeted throughout the year to record lows and investors extended duration in search for extra income.
The one- to 30-year slope of the curve flattened to 262 basis points on Monday from 332 basis points on Jan. 3. The one- to 10-year slope of the curve also flattened to 156 basis points from 163 basis points at the beginning of the year.
To be sure, the slope has steepened throughout December as yields have jumped across the curve. The one- to 30-year slope steepened to 262 basis points from 228 basis points at the beginning of the month. The one- to 10-year slope jumped to 156 basis points from 128 basis points on Dec. 3.
Triple-A to single-A credit spreads have also compressed throughout the year as investors moved down in credit quality in search for extra yield.
Despite the December sell-off, the two-year triple-A to single-A spread compressed to 30 basis points from 56 basis points at the beginning of the year. The spread did widen from 29 basis points at the beginning of December.
The 10-year spread compressed to 74 basis points from 96 basis points on Jan. 3. It widened slightly from when it started December at 67 basis points. And similarly, the 30-year triple-A to single-A spread compressed to 68 basis points from 89 basis points at the beginning of 2012. It widened slightly throughout December from where it started at 60 basis points on Dec. 3.
Exchange-traded funds that invest in municipal bonds have suffered in the recent selloff.
The iShares S&P National AMT-Free Municipal Bond ETF — ticker MUB — was up 2.45% for the year, but dropped 2.77% so far in December.
The SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF — ticker SHM — fell 0.50% for the month and is down 0.16% for the year.
The PowerShares Insured National Muni Bond ETF — ticker PZA — was up 5.28% for 2012 but has declined 2.39% during December.
Other popular ETFs, including the Market Vectors High Yield Municipal Index ETF — ticker HYD — soared 10.97% throughout the year. It saw a 1.46% decline in December.
Meanwhile, the Market Vectors Long Municipal Index ETF — ticker MLN — recorded a positive 6.12% increase for the year despite a 3.43% drop in December.
And most muni ETFs have fallen more than Treasury ETFs for the month, but are still outperforming for the year.
The ProShares Ultra Seven to 10 Year Treasury ETF — ticker UST — fell 2.06% this month, but is up 6.58% through 2012.