Traders in the tax-exempt market said municipals traded higher Thursday after steady gains all week.
Though some reads on the municipal bond market showed weakening, most traders agreed the primary was well received this week and bonds traded higher in the secondary market Thursday.
“I haven’t seen a fall off,” a Chicago trader said. “It’s steady or stronger. The bid-side is pretty much as strong as it has been.”
He added that in the secondary market, there is little supply on the long-end as most bonds have been picked over. “It’s not as active but it’s just as strong,” he said, adding there was more trading on the short and middle portions of the curve.
Other traders agreed the market was very active, and strong, this week. “Saying bonds are picked over on the long end is putting it mildly,” a Minnesota trader said. “It was a complete food fight on these new issues and every deal I looked at was bumped at least five basis points.”
Still, one trader Thursday morning said the market was weaker, following Treasuries.
“Munis are sideways or maybe down a little,” a New York trader said. “Some dealers are hitting down bids.”
The primary market was relatively quiet Thursday as the majority of the week’s largest deals priced Tuesday and Wednesday.
RBC Capital Markets priced one of the larger deals that hit the market Thursday, underwriting $84.9 million of Colorado Spring School District general obligation refunding bonds, rated Aa2 by Moody’s Investors Service.
Yields ranged from 0.25% with a 2% coupon in 2013 to 2.68% with a 4% coupon in 2030. The bonds are callable at par in 2022. Yields were lowered two basis points on credits maturing between 2022 and 2030 in repricing.
Bank of America Merrill Lynch priced $68.2 million of Illinois Finance Authority revenue bonds, rated Baa1 by Moody’s.
Yields ranged from 2.00% with a 5% coupon in 2017 to 4.35% with a 4.25% coupon and 4.19% with a 5% coupon in a split 2043 maturity. The bonds are callable at par in 2022.
In the secondary market, trades compiled by data provider Markit showed weakening across the curve, reversing a four-day firming streak.
Yields on Connecticut 5.09s of 2030 jumped three basis points to 3.86%. Yields on Los Angeles County Public Works Financing Authority 7.488s of 2033 and Broward County, Fla., Airport System 5s of 2042 rose two basis points each to 5.16% and 3.48%, respectively.
Yields on New Jersey Tobacco Settlement Financing Corp. 4.625s of 2026 and Georgia 5s of 2019 increased one basis point each to 4.92% and 0.99%, respectively.
On Thursday, the Municipal Market Data scale ended lower after four consecutive sessions of gains. The 10-year yield rose two basis points to 1.67% while the 30-year yield increased three basis points to 2.72%. The two-year finished steady at 0.33% for the third session.
The 10-year yield now trades 20 basis points above its record low of 1.47% set Nov. 28. The 30-year yield trades 25 basis points above its record low of 2.47% set Nov. 28.
Treasuries weakened Thursday after posting gains all week. The benchmark 10-year yield and the 30-year yield jumped six basis points each to 1.88% and 3.07%, respectively. The two-year yield increased two basis points to 0.27%.
Throughout this week, muni-to-Treasury ratios have fallen as munis outperformed their taxable counterparts and became relatively more expensive.
The five-year muni yield to Treasury yield ratio fell to 91.1% on Thursday from 97.4% at the end of last week. The 10-year ratio dropped to 88.8% from 90.9% last Friday. The 30-year ratio also fell to 88.6% on Thursday from 90.8% at the end of last week.
Munis have also outperformed Treasuries so far this year.
The five-year muni yield to Treasury yield ratio dropped to 91.1% from 110.5% on Jan. 2. The 10-year ratio fell to 88.8% from 96.7% at the beginning of the year. The 30-year ratio also fell to 88.6% from 93.8% at the beginning of 2013.
“Low supply allowed municipal benchmarks to outperform so far in the New Year, after municipal to Treasury ratios moved higher at year end in the run up to the fiscal cliff resolution,” wrote Alan Schankel, managing director at Janney Capital Markets.
Though munis look relatively rich compared to Treasuries, the seven- to 11-year portion of the curve are the most attractive, according to Peter DeGroot, municipal bond strategist at JPMorgan. “We recommend the seven- to 11-year sector of the investment grade yield curve based on the superior roll down potential, strong liquidity, and lower duration and extension risk than bonds further out on the curve,” he wrote. “High-grade municipal bonds are expected to realize returns — carry and roll — between 234 basis points and 326 basis points in the seven- to 11-year portion of the curve.”
He added that investors who are willing to take on more duration risk can find attractive spots between the 21- and 25-year maturities, with returns ranging from 318 basis points to 344 basis points.
But he cautioned, “In our opinion, points further out on the curve are comparatively less attractive investment options as they are exposed to much higher interest rate risk, without offering higher returns, and have markedly lower liquidity in an increasing rate scenario.”
