Market Close: Munis Outperform Treasuries As Selloff Contained

Munis outperformed Treasuries Friday, with tax-exempts holding up better than their taxable counterparts.

Munis also outperformed for the week as ratios fell on the middle- and long-end of the yield curve. By the end of the week  increasingly expensive munis made buyers more particular about the type of credit and price.

“Our institutional clients are buying at the right times and the right levels and they are more selective now than they were even earlier in the week,” a New Jersey trader said.

Next week’s issuance calendar is light, which should help buyers in the secondary. “It should help dealers with inventories,” the trader said. “We aren’t moving bonds as fast as we’d like.”

Yields on municipal bonds were “steady” compared with Treasuries on Friday, one New York trader said.

Muni-to-Treasury ratios fell in the middle and long end of the curve. The 10-year ratio dropped to 93.3% on Friday from 95.3% the previous Friday. The 30-year ratio fell to 93.7% from 94.5%. The five-year ratio reversed course, rising to 97.6% from 96.3%.

Tax-exempts have also outperformed their corporate counterparts, according to J.R. Rieger, vice president of fixed income at Standard & Poor’s Dow Jones Indices. “Corporate junk-bond yields have risen as mutual funds have seen outflows,” Rieger wrote. “Meanwhile, municipal high-yield bonds have held their own.”

The S&P U.S. Issued High Yield Bond Index has returned just under 5% year-to-date but the weighted average yield jumped up 22 basis points in the last week.

The S&P Municipal Bond High Yield Index returned 3.9% year-to-date and yields were steady to end at 5.22% this week, Rieger said. The taxable equivalent of those bonds is over 8% using the 35% tax rate.

The S&P National AMT-Free Municipal Bond Index has returned 1.26% year-to-date while the S&P U.S. Issued Investment Grade Corporate Bond Index returned just under 1%, according to S&P.

Rieger also said the five-year spot of the curve looks attractive.

The five-year range of the muni bond curve is keeping up with the overall market as the five-year S&P AMT-Free Muni Series 2018 Index has returned 1.14% while longer muni bonds in the S&P Municipal Bond 20-Plus Year Index have recorded a total return of 2.14% year to date with yields remaining steady over the course of the week.

In the secondary market Friday, trades compiled by data provider Markit showed mostly weakening.

Yields on New Jersey 5s of 2023 and Maryland Health and Higher Educational Facilities Authority 3.5s of 2029 jumped four basis points each to 2.05% and 3.77%, respectively.

Yields on Dallas-Fort Worth International Airport 5s of 2043 and Louisiana Local Governments Environmental Facilities and Community Development Authority 5s of 2035 rose two basis points each to 4.27% and 3.46%, respectively.

Yields on California’s Golden State Tobacco Securitization Corp. 5s of 2045 and California 5.75s of 2017 rose two basis points each to 2.82% and 1.10%, respectively.

Yields on California Department of Water Resources 5s of 2020 increased two basis points to 1.39%.

Yields on the Municipal Market Data scale were as much as two basis points weaker Friday.

The 10-year yield increased one basis point to 1.82% and the 30-year yield jumped two basis points to 2.97%. The two-year held steady at 0.28% for the seventh session.

The Municipal Market Advisors 5% scale showed yields rising as much as three basis points.

The 10-year yield increased two basis points to 1.88% and the 30-year yield jumped three basis points to 3.10%. The two-year yield held steady at 0.33% for a sixth consecutive session.

Treasuries were much weaker Friday. The benchmark 10-year and 30-year yields jumped eight basis points each to 1.95% and 3.17%, respectively. The two-year yield rose one basis point to 0.25%

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