The tax-exempt market ended stronger Thursday as a flight to safety, led by Treasuries, buoyed municipals. Overall for the week, larger deals were received well despite yields ending up.
“The market is feeling better,” a Chicago trader said. “I’m not sure it’s as good as some of the bumps the Municipal Market Data scale is showing, but the trades that happened earlier were strong. If it is that strong, I need to mark up my paper and I’d be happy to sell it going into the weekend.”
A New York trader said trading activity was up on Thursday. “We had a big pop. Treasuries were higher so munis were two to four basis points higher in the secondary,” he said, referring to prices. “But really, the beginning of this month has not been terribly exciting.”
In the primary market, he said the larger deals were received well last week, but smaller competitive deals struggled to find sponsorship. “The larger deals got pretty strong bids, with the bigger shops winning,” he said. Issues less than $75 million “seemed to have a harder time getting dealers’ attention. I know of at least one deal that was pulled because the high bid didn’t meet the issuer’s refunding savings target.”
While munis were stronger Thursday, yields ended up one to three basis points higher for the week, according to the MMD scale. On Thursday, the two-year yield finished steady at 0.36% for its 14th consecutive trading session while the 30-year yield finished flat at 3.42% for its third trading session. The 10-year yield closed down four basis points at 2.12%.
Treasuries had a big rally and yields ended down for the week. On Thursday, the benchmark 10-year yield dropped six basis points to 2.18% while the 30-year yield fell four basis points to 3.33%. The two-year was steady at 0.35%.
Over the past week, muni-to-Treasury ratios fell as munis outperformed Treasuries and became comparatively more expensive. The five-year muni yield to Treasury yield fell to 93.3% from 97% the week before, while the 30-year ratio dropped to 101.2% from 103.1%. The 10-year ratio fell slightly to 96.4% from 96.8% the week before.
Over the course of April, the slope of the yield curve has flattened. The 10- to 30-year slope fell to 126 basis points from 128 at the end of March. While the long end of the curve has flattened, the entire slope has steepened in April, with the one- to 30-year slope increasing to 324 basis points from 321 at the end of March.
With general market consensus showing that rates are expected to stay low for an extended period of time, muni participants are moving down in the credit scale to reach for yield. Spreads between triple-A and single-A credits have compressed across the curve since the beginning of the year.
The two-year triple-A to single-A spread plummeted to 39 basis points from 56 at the beginning of the year. The 10-year spread dropped to 78 basis points from 96 in January. The 30-year triple-A to single-A spread fell to 78 basis points from 89 basis points.
