The tax-exempt market ended stronger Monday, with the 30-year yield hitting a new low and the 10-year yield approaching its record low.
While munis were stronger, following Treasuries on continued fears from overseas, activity was on par with a typical quiet Monday.
“It’s kind of boring,” a trader in Atlanta said. “Long end is flat to slightly up,” he said, referring to prices. “It’s definitely lagging Treasuries.”
Overall, munis are benefitting from the risk-off trade. “This is ugly,” a New York trader said. “It’s everything together,” he said, referring to bad news from JPMorgan and Europe that’s pushing fixed-income markets higher.
Munis were stronger Monday, according to the Municipal Market Data scale. Yields inside three years were steady while yields outside four years dropped two and three basis points.
On Monday, the 10-year yield fell two basis points to 1.73% — just six basis points above its record low of 1.67% set Jan. 18. The 30-year yield dropped three basis points to 3.05% — setting a new record low as recorded by MMD. It beat the previous record low of 3.08% set last Wednesday. The two-year yield remained steady at 0.31% for the 19th consecutive trading session.
The Treasury yield curve flattened. The two-year yield rose one basis point to 0.27% while yields on the long end fell. The benchmark 10-year yield fell six basis points to 1.79% and the 30-year yield dropped seven basis points to 2.95%.
In the primary market, Morgan Stanley priced for retail $497.5 million of New York State Environmental Facilities Corp. state clean water and drinking water bonds for the New York City Municipal Water Finance Authority. The bonds are rated AAA by Standard & Poor’s. Pricing details were not yet available.
In competitive deals, Georgia’s Metropolitan Atlanta Rapid Transit Authority auctioned $329 million of sales tax revenue bonds in two pricings. The credit is rated Aa3 by Moody’s Investors Service and AA-plus by Standard & Poor’s.
JPMorgan won the bid for $311.1 million. Yields ranged from 1.99% with a 5% coupon in 2021 to 4.00% with a 4% coupon in 2040. The bonds are callable at par in 2022.
Guggenheim Securities won the bid for $17.9 million. The bonds matured from 2015 with a 4% coupon to 2020 with a 5% coupon. Prices were not re-offered.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed a mix of stronger and weaker trades.
A dealer sold to a customer Puerto Rico Sales Tax Financing Corp. 0s of 2054 at 6.03%, eight basis points higher than where they traded Friday. An interdealer trade of Massachusetts Health and Educational Facilities Authority 5.375s of 2017 yielded 0.75%, one basis point higher than where they traded Thursday.
Other trades show munis were stronger. A dealer sold to a customer Chicago second-lien water revenue 5s of 2042 at 3.61%, four basis points lower than where they traded Friday. A dealer bought from a customer Baltimore convention center 5s of 2032 at 5.04%, eight basis points lower than where they traded Friday.
According to trades compiled by data provider Markit, the secondary market was firmer as yields fell one to five basis points in a sample of CUSIP numbers.
Yields on Massachusetts Water Resources Authority 5.25s of 2028 fell three basis points to 2.85% while Kentucky’s Louisville and Jefferson County Metropolitan Sewer District 5s of 2022 fell one basis point to 2.14%. Yields on Houston 5s of 2025 fell five basis points to 2.51% and San Antonio water revenue 5s of 2026 slid three basis points to 2.53%.
In California news, reaction to the $16 billion budget deficit was muted in Monday trading. Yields on state debt fell in line with the rest of the market as various-purpose GO 5s of 2022 and 2042 each fell two basis points to 2.45% and 3.93%.
“From what I can see, the negative budget gap news is not affecting the way California GOs are trading in the secondary,” Markit analysts said. “Thus far, California GOs are moving with the general direction of the market.”
While individual bonds did well, muni exchange-traded funds suffered. The iShares S&P National AMT-Free Municipal Bond ETF (ticker MUB) fell 0.88% on Monday, as well as the SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF (ticker SHM), which fell 0.08%.
The PowerShares Insured National Muni Bond ETF (ticker PZA) rose 0.28% while the ProShares Ultra Seven to 10 Year Treasury ETF (ticker UST) gained 0.82%.
Gains on muni ETFs look better year to date. So far this year, MUB gained 1.54% while SHM rose 0.12% and PZA increased 4.04%. The UST also increased 4.08%.
So far in May, muni-to-Treasury ratios have risen on the short end and fallen on the long end. Most of the change in muni yields to Treasury yields came on the five-year spot where the ratio increased as munis underperformed Treasuries and became relatively cheaper. The ratio jumped to 101.3% from 97.6% at the beginning of the month.
Ratios on the long end fell slightly as munis outperformed their taxable counterparts and became relatively more expensive. The 10-year ratio fell to 95.1% from 95.9% at the beginning of May while the 30-year ratio fell to 102.3% from 102.8% at the beginning of the month.
The long end of the curve also became more expensive throughout the year. The 10-year ratio fell from 96.4% on Jan. 3 while the 30-year ratio dropped from 119.4% at the start of the year.
And while yields are at or near record lows, muni analysts at JPMorgan believe there is still some value to be found. “Tax-exempt municipals provide outpaced yield on a taxable-equivalent basis relative to taxable municipal bonds,” wrote Peter DeGroot, a muni strategist at the firm. “Triple-A taxable munis yield approximately 4% in 30 years compared to the 5.18% tax-adjusted level for tax-exempt municipals.”
He added the yield advantage increases as you move further out on the curve and further down in credit quality. “The spread between 10-year triple-A taxable equivalent yields and 10-year triple-A corporate is 97 basis points compared to the 113 basis point spread in 30-year triple-A,” he said. “The spread between 10-year triple-B taxable equivalent yields and 10-year triple-B corporate is more than twice the high-grade spread at 198 basis points.”
