Out Like a Lamb: Munis End First Half on a Quiet Note

Municipal bonds finished steady to weaker on Thursday, traders said, as they saw the first-half come to an end on the last full trading session ahead of Friday's early dismissal and Monday's full market close.

Traders also closely watched muni yields, which while moving up off record depths, still remain at historically low levels.

Since the start of the year, the yield on the 10-year muni has fallen 31 basis points while the 30-year muni yield has dropped 75 basis points.

The yield on 10-year benchmark muni general obligation on Thursday rose one basis point to 1.35% from 1.34% on Wednesday, while the 30-year muni yield was unchanged from 2.02%, according to the final read of Municipal Market Data's triple-A scale.

On Thursday, U.S. Treasuries were narrowly mixed. The yield on the two-year Treasury fell to 0.58% from 0.62% on Wednesday, while the 10-year Treasury yield was unchanged from 1.47% and the yield on the 30-year Treasury bond was flat at 2.28%.

The 10-year muni to Treasury ratio was calculated at 91.0% on Thursday compared to 90.4% on Wednesday, while the 30-year muni to Treasury ratio stood at 87.7% versus 88.1%, according to MMD.

 

Giddis Sees Muni Demand Continuing into 2nd Half

While the first half of 2016 has not been as productive for municipal bonds as last year, pent-up demand for munis will continue to maintain the market in the second half.

"The first half of the year probably hasn't been as fruitful as the first half of last year when there were so many refunding deals getting done, so we don't have that flow that we had last year when we seemed to kind of just blow it out," Kevin Giddis, executive vice president and head of fixed income at Raymond James, told The Bond Buyer.

But he said demand for municipals "has remained very, very strong and if there's a surprise it's the demand that's coming from foreign accounts into munis." Interest was coming from around the world, but especially from Asia, since rates there are negative.

He said this comes "on top of existing demand that is already in this country. And even though spreads on the triple-A scale have contracted from well over 100% to about 89% now, they're still historically cheap and demand is starting to seek it out."

Despite the low yields, demand looks set to remain steady for munis into the second half.

"There's a lot more money chasing this market than ever before and supply is not keeping up with it," Giddis said, "I don't think there will be much change from what we're seeing now until the end of the year."

He said the sweet spot in the market is in the 10-year year sector. Giddis focuses on high-grades. "It gives any kind of an investor some flexibility should the economy turn around, interest rates go up if the Fed ever gets a chance to tighten – you're still in a good spot in the curve versus out long," Giddis said.

 

Primary Market

Most of the week's larger deals had already come to market by the time Thursday rolled around.

Piper Jaffray late Wednesday priced the California School Cash Reserve Program Authority's $176.97 million of 2016-2017 bonds.

The $30.5 million of Series A bonds were priced as 2s to yield 0.60% in 2017; the $78.34 million of Series B bonds were priced as 2s to yield 0.63% in 2017; the $37 million of Series bonds were priced as 2s to yield 0.63% in 2017; the $5 million of Series D bonds were priced as 2s to yield 0.70% in 2017; and the $26.09 million of Series E bonds were priced as 2s to yield 0.63% in 2017.

The deal is rated SP1-plus by S&P Global Ratings.

 

Bond Buyer Visible Supply

The Bond Buyer's 30-day visible supply calendar decreased $2.71 billion to $5.17 billion on Thursday. The total is comprised of $2.97 billion of competitive sales and $2.21 billion of negotiated deals.

 

Tax-Exempt Money Market Funds See Outflows

Tax-exempt money market funds experienced outflows of $7.56 billion, bringing total net assets to $194.91 billion in the week ended June 27, according to The Money Fund Report, a service of iMoneyNet.com. This followed an outflow of $2.62 million to $202.47 billion in the previous week.

The average, seven-day simple yield for the 286 weekly reporting tax-exempt funds was unchanged at 0.07%.

The total net assets of the 889 weekly reporting taxable money funds increased $25.59 billion to $2.513 trillion in the week ended June 28, after an outflow of $16.34 billion to $2.487 trillion the week before.

The average, seven-day simple yield for the taxable money funds increased to 0.12% from 0.11% in the prior week.

Overall, the combined total net assets of the 1,175 weekly reporting money funds increased $18.02 billion to $2.708 trillion in the period ended June 28, which followed an outflow of $18.96 billion to $2.690 trillion.

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