Munis Bloodied as Sell-Off Hits New Supply

The tax-exempt market took a beating this week as new deals got a brutal reception and existing debt sustained significant losses in the secondary market.

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“Some deals were pulled and had to cut to cheaper levels pretty dramatically to move off the shelf.,’said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. “We still see heavy visible supply but bonds just got very cheap so now there might be demand coming back in,” he said. “The primary found its footing Thursday after a brutal couple weeks.”

Issuers who came to market early in the week had to cut prices and raise yields to entice buyers. New York City Transitional Finance Authority raised yields between three and 17 basis points in institutional pricing after raising yields as much as 10 basis points from the first retail pricing. Massachusetts School Building Authority increased yields between five and 12 basis points.

As the week progressed, the primary was better received. Rutgers University lowered yields as much as seven basis points after the deal was three to nine times oversubscribed.

The selloff, which started in early May and has lasted into Mid-June, has been focused on the longest maturities. Investors are reluctant to make longer term commitments after the Federal Reserve hinted that its $85 billion-a-month bond purchases could start to taper off this year. “The main culprit is communications from Fed officials discussing curtailing Quantitative Easing purchases,” Heckman said.

“If buyers can be patient they can get tremendous deals and bid back lower prices and pick up bonds cheaply,” Heckman said.

Outflows from municipal bond funds also showed more sellers in the long duration bonds and buyers in shorter maturities. Municipal bond funds that report weekly posted $1.6 billion in outflows, according to Lipper. “The composition of this week’s muni fund flows is similar to last week’s report as well, as long and intermediate bond funds both saw big outflows while flows into short muni funds were strongly positive,” wrote Chris Mauro, director of municipal bond research at RBC Capital Markets.

Munis have sold off faster than Treasuries and underperformed, pushing muni-to-Treasury ratios higher. Munis look more attractive than they have in many weeks with ratios well above 100%. “Ratios are attractive and we think the sweet part of the yield curve is four to eight years,” Heckman said. “There is still very good value there and those values just got even better.”

For the week through Thursday, yields on the Municipal Market Data scale soared. The 10-year yield jumped 14 basis points to 2.27% and the 30-year yield climbed 18 basis points to 3.52%. The two-year yield increased one basis point to 0.31% for the week.

Yields on the Municipal Market Advisors scale also jumped. The 10-year yield increased 16 basis points for the week through Thursday to 2.36% and the 30-year yield climbed 18 basis points to 3.64%. The two-year yield rose three basis points to 0.39%.

Treasuries ended higher for the week as yields fell. The benchmark 10-year and 30-year yields slid one basis point each to 2.15% and 3.31%, respectively. The two-year yield slid three basis points for the week to 0.28%.

Looking forward, visible supply is growing. “The market is sensing there will be some firmer footing and buyers engaged in the markets. The market will work down this inventory overhang and as we move through the rest of the summer the market can improve from here. Values have been reinstated into the marketplace.”

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