Market Close: Munis Finish Higher, Reversing Tone

The tax-exempt market ended stronger Thursday, reversing losses and a weaker sentiment from earlier in the week.

After losses and a soft market on Monday and Tuesday, many traders said the rally in Treasuries, along with limited supply expected for the next two weeks, helped fuel the change in tone.

"It was pretty strong today and it's following on the heels of Treasuries," a New York trader said. "From what I've seen new issuance has been pretty well absorbed. From where things were at the beginning of the week, it lined the primary up to go out cheaper than where it needed to be. So quite a few deals were heavily oversubscribed and then underwriters were bumping levels and cutting the yields."

He added that coming into this week, market participants were wary of a soft market as it was a week of a fair amount of primary issuance.

Other traders agreed munis were following the lead from Treasuries. "The market is doing OK," a second New York trader said. "I don't have any real reasons for it but I think we are back to following the strong rates market. With no supply next week and probably no supply the week after, we are following Treasuries."

He added that the muni market had a muted reaction to the July Federal Open Market Committee meeting minutes released Wednesday, and the market is still following Govies. "It's causing [Treasury] rates to do better so that's causing munis to do better. We are back to following Treasuries and clearly anytime the sentiment changes and we know we will be stuck in the rate environment for a while it pushes people in. But it only takes a couple buyers to push things around." He added trading volume is still relatively light.

Trades were looking strong even from when the markets opened. "We are busy today," another New York trader said in the morning. "Up, up, and away."

Overall for the week, the tone of the market is much better than where it started. "We have a better tone now for the week," the first trader said. "Yields overall are tighter and underwriters were able to place paper and jump on that rally from Treasuries."

And the firmer tone could continue, traders say. "For the next few weeks it seems like traders will continue to take vacation and then it's a shortened week for Labor Day and the primary will dwindle off," the first New York trader said. "And maybe that's why it jumped up this week. People got in to get things done."

In the primary market, Citi priced $810 million of New Jersey Turnpike Authority revenue bonds, rated A3 by Moody's Investors Service, A-plus by Standard & Poor's, and A by Fitch Ratings. Pricing details were not available by press time.

On Thursday, the 10-year Municipal Market Data yield dropped four basis points to 2.95% while the 30-year yield plummeted six basis points to 1.81%. The two-year closed at 0.29% for the 21st straight session.

The gains on Thursday pushed muni yields back down to levels not seen since August 14 when the 10-year closed at 1.80% and the 30-year finished at 2.95%.

Treasuries gained for the third consecutive session. The benchmark 10-year yield dropped three basis points to 1.67% while the 30-year yield fell two basis points to 2.79%. The two-year was steady at 0.28%.

In the secondary market, trades compiled by data provider Markit showed firming. Yields on Connecticut 5s of 2029 and La Porte, Texas, Independent School District 5s of 2022 dropped five basis points each to 2.64% and 2.20%, respectively.

Yields on Dormitory Authority of the State of New York 5s of 2026 fell four basis points to 2.53% while California's Golden State Tobacco Securitization Corp. 5s of 2045 fell three basis points to 4.30%.

So far in August, muni exchange-traded funds have suffered. The iShares S&P National AMT-Free Municipal Bond ETF — ticker MUB — fell 0.67% so far this month. The SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF — ticker SHM — dropped 0.16%. The PowerShares Insured National Muni Bond ETF — ticker PZA — fell 0.47% since the start of August.

Other popular ETFs, including the Market Vectors High Yield Municipal Index ETF — ticker HYD — fell 0.03% while the Market Vectors Long Municipal Index ETF — ticker MLN — fell 0.64%.

Despite the drops, the muni ETFs outperformed the ProShares Ultra Seven to 10 Year Treasury ETF — ticker UST — which plummeted 1.88% this month.

Most muni ETFs had mixed performance compared to corporate bond ETFs. The iShares iBoxx High Yield Corporate Bond ETF — ticker HYG — fell 0.20%, and the iShares iBoxx Investment Grade Corporate Bond Fund ETF — ticker LQD — fell 0.75%.

In August, muni-to-Treasury ratios fell as munis outperformed Treasuries and became comparatively more expensive. The five-year ratio fell to 98.6% from 101.6% at the beginning of the month. The 10-year ratio dropped only slightly to 108.4% on Monday from 108.5%. The 30-year ratio dropped to 105.7% from 109.6%.

And that trend has continued since the beginning of the year at least on the short and long end. Since the start of 2012, the five year ratio has barely budged, falling only slightly to 98.6% from 98.9%. But the ratio plummeted to 105.7% from where it started the year at 119.4%.

In the 10-year range, ratios have increased as munis have underperformed and became comparatively cheaper. The ratio jumped to 108.4% from 96.4% at the beginning of the year.

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