The municipal bond market took a breather on Friday as the primary was devoid of any new issuance and the secondary saw yields remain unchanged, according to Municipal Market Data.
But one component of the market that has been commanding some attention is the muni-to-Treasury ratio. The ratio is calculated by taking the yield on a triple-A rated muni and comparing it to the yield on a Treasury of a similar maturity. The higher the ratio, the more attractive tax-exempts are to Treasuries. When used in combination with other measures, it can be a valuable tool for investors and fund managers in gauging the relative value of munis.
"The triple-A MMD ratio in 10-years inched up to nearly 95% of treasuries at the close of Tuesday. The last time there was a spike in issuance, buyers felt pretty comfortable buying ratios around 91%. Given that issuance will drop dramatically for the Thanksgiving holiday and only a couple of weeks of any substantial calendar remain for the balance of the year, a buying opportunity was knocking on the door," according to MMD Senior Market Analyst Randy Smolik.
"It's a valid and useful measure of the relative value of municipal bonds," said Alan Schankel, a managing director at Janney Capital Markets. "With few signs of receding demand given the highest tax rates since 1986 and the demonstrated value of the tax exemption when comparing municipal bond yields to taxable alternatives, elevated ratios may represent an opportune entry point for tax-free investors."
Other market professionals also see value in municipals at this time.
"The current returns on the 10- and 30-year offer compelling value for muni buyers," said Sean Carney, municipal strategist at BlackRock Inc.
He explained that the "quoted" ratio is usually based on high-quality bonds like the MMD triple-A scale. But, he said, that for most of the market in the AA or A range the "real" ratio can usually be even more attractive for buyers than the "quoted ratio."
"The 'real rates' are what buyers get when they purchase the bonds and put them into portfolios and they are at a more attractive level now than even the quoted rates," he said.
Carney said that a level of 90% for 10-years and 100% for 30-years are where "we see strong interest from non-traditional buyers - the cross over buyers. Conversely, we tend to see profit-taking when they fall below these levels."
"We are optimistic that through these ratios in the short-run (the next three months) munis may outperform and these ratios may get lower based on a long-term observation of the market," said Dan Berger, MMD Senior Municipal Strategist. "During the past 10 years the 10-year muni/Treasury ratio has declined for the three month period between Nov. 15 and Feb. 15 eight times, while this happened seven times for the 30-year ratio."
Bond Funds See Inflows
While it may have been chilly outside, retail investors kept a warm spot for municipals as bond fund inflows rose in the latest week. Muni bond funds have seen inflows in 40 out of the 47 weeks this year.
Funds that report weekly had $590.0 million of inflows for the period ending Nov. 20, down from $649.0 million the week before, according to Lipper FMI. Assets of all weekly reporting municipal funds rose to $333.7 billion from $314.3 billion. The four-week moving average rose to $340.3 million from $203.1 million.
Flows for long-term muni funds were positive, as they reported $306.5 million in inflows, up from an inflow of $186.0 million in the previous week. Long-term municipal mutual fund assets increased to $180.3 billion from $165.0 billion last week. The four-week moving average saw an inflow of $97.0 million, up from an outflow of $1.2 million last week. High yield funds reported inflows totaling $171.8 million following inflows of $127.5 million previously. Assets rose to $51.4 billion from $48.2 billion last week. The four-week moving average rose to $84.6 million from $29.4 million.
Primary, Secondary Market
After the hefty new-issue calendar, the holiday-shortened Thanksgiving week will see volume fall to $911 million from about $7 billion. The calendar will be composed of around $730 million of negotiated deals and about $181 million of competitive sales.
Municipal bond yields were unchanged at the close, with the benchmark 10-year GO steady at 2.15% and 30-year GO flat at 3.08%, according to the final read of Municipal Market Data's triple-A scale.
Treasury prices were little changed with the two-year note yield flat at 0.51% from Thursday's market close. The 10-year yield was off two basis points at 2.32% and the 30-year was off two basis points at 3.03%.
