Triple-A tax-exempt bonds ended firmer for the week, a reversal after eight weeks of losses stemming from municipal bond mutual fund outflows and negative headlines.
Demand for municipal bonds that pushed yields on triple-A paper lower by one to two basis points this week was supported by institutional buyers. Retail buyers remain net sellers, withdrawing $1.47 billion from muni bonds that report weekly, according to Lipper FMI.
“Demand is centered around larger blocks of liquid paper,” said Robert Millikan, executive director at Sterling Capital, who manages state-specific municipal bond fund portfolios. “There is tremendous appetite for high grade municipals from crossover buyers, and that comes in $10 million-plus line items. Those blocks trade remarkably better than a single million of the same name. So it’s definitely a bifurcated market of non-traditional and traditional municipal buyers.”
Crossover buyers have come into the market as muni-to-Treasury ratios cross 100%. The 10-year ratio hovered around 107% and the 15-year ratio closed at 116%. On the long end of the curve, ratios looked even more attractive with the 20- and 30-year ratios at 120%.
More outflows from municipal bond mutual funds also keep retail out of the market, allowing cross-over buyers to step in. “Traditional muni managers are seeing flows going out and they are not looking at relative value,” Millikan said. “They are more cautious investors. Continued negative performance and outflows everyday bring a chance for more losses and less profit. But cross-over buyers see relative value.”
In the secondary market, trading activity fell this week from the previous week, according to Interactive Data. On Monday, there were 47,039 trades, down from the previous Monday’s 47,196. Par value traded rose to $6.030 billion from the previous Monday’s $5.734 billion. Retail participation in par value traded fell to 43% from 45%.
On Tuesday, activity slipped to $51,796 trades of $8.637 billion from 54,178 trades of $8.823 billion the previous Tuesday. Retail participation of par value traded fell to 36% from 37%.
By Wednesday, trading activity slid to 50,628 trades of $8.487 billion from 54,829 trades valued at $10.559 billion. In a reversal, retail participation increased to 37% from 34% the previous Wednesday.
Though yields moved slightly lower this week, there is still value to be found on the five- to eight-year part of the curve, Millikan said. “There is tremendous yield pickup from extending one year on that part of the curve. We focus on total return more than just the income aspect. And the roll down of the curve is most beneficial there.”
Spreads are fairly compressed right now, Millikan said. “Things seem to look better from a high-grade perspective. Double-A general obligation bonds seem to have the best value. There is still some spread and it’s not as compressed.”
For the week through Thursday, the 10-year Municipal Market Data yield fell two basis points to 2.94% and the 30-year yield slid one basis point to 4.45%. The two-year held steady for the week at 0.43%.
The 10-year Municipal Market Advisors yield slid two basis points for the week through Thursday to 3.08% and the 30-year yield fell one basis point to 4.54%. The two-year held steady at 0.55%.
Treasuries posted gains for the week. The benchmark 10-year yield slid seven basis points through Friday afternoon to 2.76% and the 30-year yield fell 12 basis points for the week to 3.68%. The two-year was steady at 0.39%.
