The tax-exempt market received lackluster attention at the end of the week as traders appeared to be more concerned with the upcoming Independence Day holiday than with trading muni bonds.
“Munis were OK this week,” a New York trader said. “I don’t love munis here at these levels.”
A trader in Atlanta agreed, and even went so far as to say he didn’t participate in the market. “I did not trade any munis this week,” he said. “But we bought a lot on a closed-end fund this week that will invest in long term munis with an average credit of A-minus.”
Munis were steady for the fifth consecutive trading session Friday, according to the Municipal Market Data scale. The 10-year yield ended flat at 1.86% for the 11th trading session while the two-year ended steady at 0.32% for the 21st straight session. The 30-year yield finished flat at 3.16% for the sixth session.
Over the course of June, yields jumped as supply outweighed demand. The 10-year yield spiked up 11 basis points from 1.75%, where it started the month. The 30-year yield jumped 12 basis points from 3.04% on June 1. The two-year was flat during the month.
Treasuries weakened Friday. The benchmark 10-year yield jumped seven basis points to 1.65% while the 30-year yield spiked nine basis points to 2.76%. The two-year yield rose one basis point to 0.32%.
In the secondary market Friday, trades compiled by data provider Markit showed mostly firming. Yields on Buckeye, Ohio, Tobacco Settlement Financing Authority 5.875s of 2047 dropped three basis points to 7.82% while San Francisco Unified School District 4s of 2025 fell two basis points to 2.94%.
Yields on Levelland, Texas, Consolidated Independent School District 4s of 2035 and Houston Utility System 5s of 2033 each fell two basis points to 2.88% and 3.19%.
Over the course of June, muni-to-Treasury ratios fell as munis outperformed Treasuries and became comparatively more expensive. The two-year ratio plunged to 100% at the end of June from 123.1% on June 1. The 10-year ratio fell to 112.7% from 119.9% at the start of the month. The 30-year ratio dropped to 114.5% on June 29 from 120.6% at the beginning of June.
The slope of the yield curve widened throughout June as too much supply overwhelmed demand. The one- to 30-year slope widened to 296 basis points from 284 basis points at the beginning of the month. The one- to 10-year slope also widened to 166 basis points from 155 basis points.
Credit spreads also widened throughout the month. The 10-year triple-A to single-A spread widened to 79 basis points at the end of June from 78 basis points at the start of the month. The 30-year spread jumped to 80 basis points from 75 basis points. The two-year triple-A to single-A spread held steady at 39 basis points.
Now at the halfway point of the year, many firms continue to believe munis remain a good investment for the remainder of 2012. John Mousseau, head of tax-free munis at Cumberland Advisors, said munis are cheap when looking at historical ratios.
The drop in muni yields this year was much less dramatic than the drop in Treasuries. “This has effectively erased the lowering of ratios that we saw in the first quarter and put municipal bonds’ relative cheapness back to the same levels as last fall, and cheaper than where they finished 2011,” Mousseau noted. “The relative value of municipals is such that, at these ratio levels, an eventual rise in Treasury yields due to an improvement in the overall global economy combined with a return to traditional ratios — 85% in the 10-year range and 90% in the 30-year range — should result in very good relative performance from municipals.”
