The tax-exempt market was fairly quiet Monday as only a few deals priced in the primary and trading activity was slow in the secondary.
Still, for the day, yields fell, continuing a week-long trend of steady to firmer municipal bonds.
“The market is up maybe two to three basis points, but there is not a lot of activity in terms of trading,” a New Jersey trader said, adding that Puerto Rico 5s of 2041 are selling for 5.07% Monday morning after being offered at 5.10% on Friday. “So we’re up on the long end.”
Focus is on the secondary, he said, due to the light new-issue calendar this week.
A New York trader noted activity was relatively quiet. “It’s just slow,” he said. “Nothing is really going on. It’s mostly just retail buying.”
Munis were firmer Monday, according to the Municipal Market Data scale. Inside three years, yields were steady while outside four years, yields dropped two and three basis points.
The two-year yield closed steady at 0.31% for the fourth consecutive trading session. The 10-year yield and the 30-year yield each dropped three basis points to 1.85% and 3.25%.
Treasuries were weaker after a global stock sell-off. The benchmark 10-year yield and the 30-year yield each fell four basis points to 1.93% and 3.08%. The two-year was steady at 0.27%.
Citi priced $153 million of North Carolina Medical Commission health care facilities revenue refunding bonds, rated A1 by Moody’s Investors Service and A-plus by Standard & Poor’s. Pricing information was not available by press time.
Janney Montgomery Scott priced for institutions $126.4 million of Rhode Island general obligation bonds, rated Aa2 by Moody’s and AA by Standard & Poor’s and Fitch Ratings.
In institutional pricing, yields ranged from 0.83% with 3% and 5% coupons in a split 2015 maturity to 3.18% with a 3.125% coupon in 2027. The bonds are callable at par in 2022.
According to data compiled by Markit, munis were firmer in the secondary market when compared to Friday. Of a sample of five CUSIP numbers, yields fell between two and eight basis points.
Yields on Newport Mesa, Calif., Unified School District 5s of 2028 dropped eight basis points to 2.92%, while Atlanta airport revenue 5s of 2037 fell six basis points to 3.84%. Yields on Georgia 5s of 2017 and Rochester, Minn., 5s of 2020 fell four basis points each to 0.84% and 1.50%.
Trades reported by the Municipal Securities Rulemaking Board also showed firming in the secondary market.
A dealer sold to a customer California State Public Works Board 4s of 2027 at 3.83%, 35 basis points lower than where they traded Friday.
A dealer bought from a customer New Jersey’s Tobacco Settlement Financing Corp. 5s of 2041 at 6.82%, eight basis points lower than where they traded a week prior.
A dealer sold to a customer Virginia Small Business Financing Authority 6s of 2037 at 4.90%, five basis points lower than where they traded last Thursday.
A dealer bought from a customer Puerto Rico Electric Power Authority 5s of 2029 at 4.70%, three basis points lower than where they traded last Thursday.
Over the past week, muni-to-Treasury ratios have fallen as munis outperformed and became relatively more expensive. Over the course of the last week, the five-year muni yield to Treasury yield fell to 98.8% from 104.8% the week before while the 10-year ratio dropped to 95.4% from 99% the week before.
The 30-year ratio also fell slightly to 105.1% from 106.4% last Monday.
And despite falling ratios, analysts at Citi said munis still offer opportunities when compared to Treasuries. “The five-year triple-A MMD sector has cheapened significantly over the last month versus five-year Treasuries, with the yield ratio consistently trading above 100% over the last week,” wrote George Friedlander. “We could see some outperformance of the five- to seven-year MMD if Treasury yields were to back up or even remain relatively stable. Current levels remain attractive as entry points for short five-year ratio trade.”
The one- to 30-year slope of the yield curve flattened over the past week to 308 basis points from 311 basis points the week before. The 10- to 30-year slope steepened to 140 basis points from 136 basis points as investors purchased bonds in the 10-year spot faster than they bought up 30-year bonds.
With yields still near historical lows, investors continue to reach down the credit scale in search for yield. Since the beginning of the year, the triple-A to single-A spreads have tightened on the short and long end of the curve.
The two-year triple-A to single-A spread has tightened to 39 basis points from 56 basis points at the beginning of the year, while the five-year spread has also compressed to 65 basis points from 82 basis points at the start of the year.
Moving further out on the curve, the 10-year triple-A to single-A spread fell to 82 basis points from 96 basis points in early January while the 30-year spread dropped to 76 basis points from 89 basis points at the start of the year.
While new-issue supply fell this week and is expected to continue to fall for the next few weeks, Friedlander said he still sees some value in the market.
“We still continue to find that a large number of muni investors have too much uninvested cash and-or are facing heavy bond calls and maturities on their highest-yielding munis,” he wrote. “Currently, the five- to seven-year part of the curve offers more value versus Treasuries or versus the 10-year part of the curve.”
In terms of duration, Friedlander is more optimistic than bearish. “We maintain a fairly bullish view on duration near-term, despite low absolute yields,” he said.
While households continue to hold cash, if they decide to invest their capital, most cash will be put in the short end of the curve, according to Friedlander. Also, as the high-coupon payments months of June and July approach, investors will have more cash to invest, further supporting the technicals of munis.
Outside the municipal market, Friedlander says the possibility of negative economic data will further support munis. “Any further disappointment can rattle confidence that the economic growth is gaining traction and support the flight-to-safety bid for Treasuries, which will likely drag MMD rates lower,” he said.
