The tax-exempt market started the week on a strong note as traders said a stabilized Treasury market and little issuance this week allowed for firm trading.
“The muni market at the end of last week started to get a firmer tone in the secondary and that’s followed through today,” said Pete Stare, senior underwriter at FirstSouthwest. “The market feels better.”
He added the front end of the curve is trading steady, and the market is firmer in longer duration bonds. “Bonds past 10 years that got hit the worst in late December are doing well. They are a few basis points higher, but it’s not a full-fledged rally.”
A slight increase in supply should be welcomed by the market. “We are getting a little test for the market this week with a new issue calendar of between $2 and $3 billion,” Stare added.
Indeed, the primary market can expect $2.7 billion of muni bonds this week, up from last week’s revised $11.7 million. In the negotiated market, $1.72 billion is expected to price, up from last week’s revised $4 million. On the competitive calendar, $1.02 billion should be auctioned, up from last week’s revised $7.7 million.
Stare added, “It’s not an overwhelming amount but the Ohio competitive deal is a key bellwether and should give direction for the market.”
Ohio is expected to auction $219.3 million of infrastructure improvement bonds Tuesday, rated Aa1 by Moody’s Investors Service and AA-plus by Fitch Ratings.
Monday morning, munis were flat with less trading activity. “Munis are quiet,” a New York trader said. “Some bonds are off, some bonds are up. So it’s about steady.”
Other traders said that while the market had a firmer tone, the overall tone is cautious. “The almost complete lack of new issue paper is helping support the market although several participants still say they are convinced a large shadow supply is waiting for a more stable market,” wrote Dan Toboja, vice president at Ziegler Capital Markets. “Last week outflows were very minimally negative from muni funds. So the pressure to sell has subsided and bid sides have begun to spring up for selective credits and structures.”
He added, “The overall tone remains cautious. Desks are very aware of how much damage the fiscal cliff talk did at the end of 2012 and are hesitant to take large positions ahead of what could be a very similar situation in a couple months. Until we get some real leadership from DC and some clarity on the muni exemption [and] debt ceiling, munis will tread with caution in 2013.”
In the secondary market, trades compiled by data provider Markit showed strengthening. Yields on Georgia 5s of 2021 fell three basis points to 1.40% while New York City Transitional Finance Authority 3s of 2032 dropped two basis points to 3.15%.
Yields on New Jersey Tobacco Settlement Financing Corp. 4.5s of 2023 and Centre City, Penn., Hospital Authority 5s of 2047 fell one basis point each to 4.56% and 4.03%, respectively.
Yields on New York’s Metropolitan Transportation Authority 5s of 2042 and Austin, Texas, 5s of 2020 dropped one basis point each to 3.40% and 1.85%, respectively.
On Monday, the Municipal Market Data scale finished a few basis points stronger. The 10-year and 30-year yields fell two basis points each to 1.78% and 2.87%, respectively. The two-year closed flat at 0.36% for the fourth consecutive session.
Treasuries also finished stronger Monday. The benchmark 10-year yield fell two basis points to 1.90% while the 30-year yield fell one basis point to 3.10%. The two-year was steady at 0.28%.
Over the past week, muni-to-Treasury ratios have fallen as munis outperformed and became relatively more expensive. Munis weakened, but not as much as Treasuries.
On Monday, the five-year muni yield to Treasury yield ratio fell to 102.4% from 112.5% on Dec. 31. The 10-year ratio fell to 93.7% from 99.4% while the 30-year ratio closed down at 92.6% from 96.9% the previous Monday.
Munis outperformed Treasuries throughout the course of last week due to the risk-on rally from the American Taxpayer Relief Act. “In the wake of this news, yields in the 10-year portion of the curve were higher by just two basis points, after adjusting for six basis points of roll, versus a 17 basis point increase in Treasury yields,” wrote Peter DeGroot, municipal bond strategist at JPMorgan.
And minimal issuance in the primary market has also allowed munis to outperform Treasuries. There is $2.7 billion schedule this week after $11.7 million last week. “By comparison, the first full weeks of 2009, 2010, and 2012 saw $5 billion, $7.3 billion and $4.6 billion, respectively,” DeGroot added.
Munis are rich relatively to Treasuries but consistent with the six-month regression to Treasury rates, he noted. “[This] week’s high quality slate of offerings will provide some indication as to the market’s appetite for municipals after the move higher in Treasury yields without a concurrent move to higher rates in municipals.”
