Market Close: Munis Launch Comeback After Week of Losses

The tax-exempt market made an about-face Friday, posting gains for the first time in more than a week after traders said municipal bond yields looked very cheap relative to Treasuries.

Muni yield to Treasury yield ratios closed mostly above 100%, enticing non-traditional buyers to enter the market.

“We finally stabilized,” a Boston trader said. “Treasuries are up and crossover buyers are in. It’s just so cheap.”

Analysts at Interactive Data also said crossover buyers were responsible for the gains Friday. “Current indications show tax-exempt municipal bonds rallying anywhere from three basis points to 10 basis points, with the long-end of the curve leading the way on heavy volume. Strong demand from cross-over buyers has been reported by the Street.”

Still, other traders weren’t convinced the rally was sustainable.

“You look at trades and it feels like people are really grabbing for offerings,” a Texas trader said. “But when the market snaps back, especially on a Friday, it’s hard to embrace anything. The past few weeks have been such a whipsaw.”

This trader added the market has been driven by sentiment. “With the headlines out of Detroit and mutual fund outflows, who are the real buyers right now? The market is one piece of good news or bad news away from three points in either direction. We could walk in Monday and it could be in the other direction or up another few points.”

In the secondary market, trades compiled by data provider Markit showed strengthening.

Yields on Bexar County, Texas, 5s of 2029 fell 11 basis points to 3.95% and Houston Utility System 5s of 2029 slipped eight basis points to 4.09%.

Yields on Connecticut 5s of 2023 fell eight basis points to 3.10% and Maryland Health and Higher Educational Facilities Authority 5s of 2041 dropped four basis points to 5.12%.

Yields on New Jersey Tobacco Settlement Financing Authority 5s of 2041 fell three basis points to 7.38%.

Friday, yields on the Municipal Market Data scale ended as much as 10 basis points lower. The 10-year yield slipped seven basis points to 2.70% and the 30-year yield fell 10 basis points to 4.21%. The two-year finished flat at 0.43% for the eighth consecutive session.

Yields on the Municipal Market Advisors scale also ended as much as 10 basis points lower. The 10-year yield fell seven basis points to 2.89%. and the 30-year yield dropped 10 basis points to 4.29%. The two-year was steady at 0.54% for the third session.

Treasuries were stronger Friday. The benchmark 10-year yield slipped three basis points to 2.56% and the 30-year yield fell five basis points to 3.61%. The two-year yield fell one basis point to 0.33%.

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