Yields on tax-exempt bonds ended almost 20 basis points higher as weakened demand in the primary, illiquidity in the secondary, and a softer Treasury market pulled bond prices lower.
“We saw a very weak market until late Thursday and secondary positions were cut 10 to 20 basis points to move inventory out the door,” said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. “Then we saw some better activity and buyers coming in at these cheaper levels.”
Even with a relatively light new issue calendar in the holiday-shortened trading week and demand lingering on the horizon with June 1 reinvestment money, buyers demanded much higher yields for deals.
“There is dwindling new issuance this week and we don’t see it picking up much next week and money should be cascading into the market in June from those calls, redemptions, interest payments, and bonds maturing. So fundamentals will be stronger as we go through the month of June absent any extreme interest rate volatility.”
JPMorgan priced for institutions $500 million of New York’s Metropolitan Transportation Authority revenue bonds. In institutional pricing, yields were raised as much as eight basis points on bonds maturing between 2017 and 2023. Yields on most bonds maturing between 2031 and 2042 were raised as much as 15 basis points.
Jefferies priced $104.4 million of triple-A rated Virginia Resources Authority clean water state revolving fund revenue bonds. Bonds with 5% coupons yielded 17 basis points to 28 basis points above the Municipal Market Data scale.
Treasury auctions that didn’t go well following a three-day weekend and the previous week’s statement from the Fed that it was prepared to taper QE, pushed many market participants out of the market. “We saw more illiquidity this week as we headed into Treasury auctions coming off a holiday,” Heckman said. But as the week progressed and munis found a bottom Thursday, buyers emerged. “We were buyers yesterday and we continue to be buyers in extreme weakness when we can bid secondary pieces back and achieve those levels.”
For the week, yields on the Municipal Market Data scale ended higher. The 10-year yield rose 17 basis points to 2.07% and the 30-year yield jumped 14 basis points to 3.22%. The two-year was steady for the week at 0.29%.
Yields on the Municipal Market Advisors scale also ended multiple basis points higher. The 10-year yield increased 15 basis points to 2.12% and the 30-year yield rose 13 basis points to 3.32%. The two-year yield rose one basis point for the week at 0.36%.
Treasury yields also ended higher across the curve for the week. The benchmark 10-year yield jumped 16 basis points to 2.17% and the 30-year yield rose 14 basis points to 3.31%. The two-year yield increased four basis points for the week to 0.32%.
Even with the selloff, munis outperformed Treasuries and some say it could continue for the rest of the year. “Unless there is an incredibly strong unemployment report next week the market will perform a bit better in June,” Heckman said. “We saw muni ratios get below 100% on the 10-year and now those ratios came back up a little bit. So overall the market looks attractive relative to taxables. So far this year munis have outperformed Treasuries and we think that will be the story for the rest of the year as the value proposition remains for munis versus taxables.”
