The tax-exempt market continued to strengthen Thursday as demand in the new-issue market exceeded supply.
Traders said the primary market stole the focus for the week and yields were lowered in institutional order periods and repricings in most of the deals.
“The tone is decent,” a Los Angeles trader said. “It has been quite a week and the focus has been on new issues more than on the secondary.”
“I think there are 17 issues across the country that are all over $100 million this week, so we didn’t have one particular huge deal, but just a lot of big deals,” the trader said. “They were all pretty-well absorbed.”
He added that most deals have lowered yields in repricing.
“I don’t know how much lower rates can go,” he said. “I guess zero is the hard limit.”
A falling-rate environment is a much harder market to trade in, a New York trader said.
“When rates are lower, it’s less busy,” he said.
Munis ended stronger Thursday, according to the Municipal Market Data scale. Yields inside three years were steady while yields outside four years dropped between two and four basis points.
On Thursday, the two-year yield closed steady at 0.31%. The 10-year yield dropped four basis points to 1.88% while the 30-year yield declined two basis points to 3.28%.
Treasuries also climbed Thursday. The benchmark 10-year yield fell two basis points to 1.96% and the 30-year yield fell one basis point to 3.12%. The two-year was steady at 0.27%.
In the primary market, Barclays Capital repriced $174.1 million of California’s Sonoma-Marin Area Rail Transit District Measure Q sales tax revenue bonds, rated AA by Standard & Poor’s and A by Fitch Ratings.
Yields ranged from 1.03% with a 4% coupon in 2016 to 3.42% with a 5% coupon in 2029. The bonds are callable at par in 2022.
Yields were lowered up to 10 basis points from the preliminary pricing.
Munis were stronger, according to data compiled by Markit. Of nine CUSIP numbers, eight were firmer with yields falling up to six basis points.
Yields on Southeastern Pennsylvania Transportation Authority 4s of 2018 fell five basis points to 1.63%, while Ohio 5s of 2021 dropped two basis points to 2.12%.
Yields on Puerto Rico Aqueduct and Sewer Authority 5s of 2019 fell six basis points to 3.41%, while San Antonio 5s of 2023 fell three basis points to 2.27%.
Trades reported by the Municipal Securities Rulemaking Board also showed strengthening in the secondary market.
A dealer sold to a customer San Francisco Airport Commission 4s of 2012 at 0.30%, 10 basis points lower than where they traded Monday.
A dealer sold to a customer University of California Regents century bond 4.858s of 2112 at 4.75%, five basis points lower than where they traded Tuesday.
A dealer bought from a customer California Department of Water Resources 5s of 2012 at 0.23%, two basis points lower than where they traded last Friday.
So far this week, muni-to-Treasury ratios have fallen as munis outperformed Treasuries and became relatively more expensive.
The five-year muni yield to Treasury yield fell to 101.2% from 102.4% last Friday.
The 10-year ratio fell to 97% from 99% at the end of last week.
The 30-year ratio remained at 105.4%.
Despite the five-year ratio falling, MMD’s Daniel Berger thinks the five-year spot on the curve is still the cheapest — especially when looking at the average ratio over the past three months, which was 88.2%.
“The five-year range offers a safe harbor and likable ratios to Treasuries,” he wrote. “However, performance is really hindered by the compression of spreads between maturities and yield in that sector. Professionals have a grip on the 10-year range — they really want to see ratios staying the same or moving lower.”
Meanwhile, the slope of the yield curve has fallen to 310 basis points from 312 basis points last Friday as investors move further out on the yield curve. But the 10- to 30-year slope of the curve rose slightly to 138 basis points from 135 basis points last Friday.
Spreads on the triple-A to single-A yields show that throughout April, investors were more comfortable going down the credit scale on the short end, but favored higher-rated bonds on the long end.
The five-year triple-A to single-A spread fell to 65 basis points from 67 at the beginning of April.
But the 10-year and 30-year spreads between the triple-A and single-A yields rose to 79 basis points from 78 basis points at the beginning of the month.
Not all analysts agree moving down the credit scale is the right move.
“[We have] advocated shifting out of high yield municipals into higher rated sectors since late 2011,” analysts at Trident Municipal Research wrote. “The reach for yield in the tax-exempt municipal market has helped drive returns for A-rated and BBB-rated municipals to outperform AA-minus and AAA-rated bonds over most of the post-financial crisis period. However, that outperformance has not been a consistent trend.”
“If market psychology continues to shift to a more risk-aware and risk-averse mode, [we] would look to the extended correction period as an indication of the downside risk for BBB credits,” the analysts said.
