The municipal bond market ended Monday on a quiet note with yields steady as traders waited for a large amount of supply to hit the market later in the week.
While this week’s $9 billion in issuance is much larger than last week’s $4 billion, traders said there is ample cash on the sidelines to absorb it.
“It’s very quiet,” a Los Angeles trader said. “There is over $9.5 billion coming so people are sitting and waiting.” He added the market has plenty of cash to absorb the new money. “People are flush with cash so the high supply can be absorbed well.”
In preparation of the supply expected to hit the market, traders tried to clear their books. “I’m hoping the scale will bounce back a little from Thursday and yields go down because I need to sell,” the trader said. “People are trying to clean up the books because they want to get into new issues this week. But I don’t see any adjustments to the scale.”
Indeed, other traders said the market was flat and quiet coming out of the weekend. “It’s dead because of the Jewish holiday,” a New York trader said. “People are at work, but trading is dead.”
The primary market was slow Monday. Citi won the bid for the largest issue — $71.7 million of King County, Wash., limited tax general obligation refunding bonds. The credit is rated Aa1 by Moody’s Investors Service, AAA by Standard & Poor’s, and AA-plus by Fitch Ratings.
Yields ranged from 0.20% with a 2% coupon in 2012 to 3.50% with a 3.6% coupon in 2034. The bonds are callable at par in 2022.
In the secondary market, trades compiled by data provider Markit showed mostly weakening. Yields on Apache County, Ariz., Industrial Development Authority 4.5s of 2030 jumped three basis points to 4.02% while Massachusetts School Building Authority 5s of 2023 rose two basis points to 2.24%.
Yields on University of Colorado Enterprise System 5s of 2030 and Washington State certificates of participation 4s of 2028 increased one basis point each to 2.84% and 3.26%, respectively.
On Monday, the 10-year Municipal Market Data yield closed steady at 1.93% while the 30-year yield finished flat at 3.06%. The two-year closed at 0.29% for the 37th consecutive session.
The 10-year MMD yield is now the highest since April 17, when it yielded 1.95%. The 30-year yield is the highest since July 10 when it touched 3.06%.
The Treasury yield curve flattened Monday with yields rising on the short end and falling on the long end. The two-year yield increased one basis point to 0.27%. The benchmark 10-year yield dropped three basis points to 1.84% while the 30-year yield plunged six basis points to 3.03%.
Over the course of September, muni exchange-traded funds have suffered. The iShares S&P National AMT-Free Municipal Bond ETF — ticker MUB — fell 0.84% so far this month. The SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF — ticker SHM — dropped 0.45%. The PowerShares Insured National Muni Bond ETF — ticker PZA — fell 1.25% since the start of August.
Other popular ETFs, including the Market Vectors High Yield Municipal Index ETF — ticker HYD — fell 0.73% while the Market Vectors Long Municipal Index ETF — ticker MLN — fell 1.78%.
Despite the drops, the muni ETFs outperformed the ProShares Ultra Seven to 10 Year Treasury ETF — ticker UST — which plummeted 3.64% this month.
Most muni ETFs had mixed performance compared to corporate bond ETFs. The iShares iBoxx High Yield Corporate Bond ETF — ticker HYG — increased 1.59%, but the iShares iBoxx Investment Grade Corporate Bond Fund ETF — ticker LQD — fell 0.60%.
Over the course of the year, muni ETFs have mostly failed to keep up with their taxable counterparts. Since the start of 2012 the MUB has jumped 2.25% while the SHM has increased 0.16%. The PZA increased 3.79% while the HYD has soared 9.56%. The MLN has jumped 4.49%.
Meanwhile UST has increased 4.61%. And corporate bond ETFs have performed well. HYG rose 4.88% since the beginning of the year while LQD increased 5.58%.
So far this month, muni-to-Treasury ratios have fallen as munis outperformed their taxable counterparts and became relatively more expensive. The five-year ratio dropped to 104.2% on Monday from 111.3% on Sept. 4. The 10-year muni yield to Treasury yield ratio fell to 104.9% from 109.5% at the beginning of September. Similarly, the 30-year ratio dropped to 101% from 107.4% at the start of the month.
To be sure, munis look cheap relative to Treasuries from where they started at the beginning of the year. Ratios have risen on the short- and intermediate portion of the curve as munis have underperformed their taxable counterparts. The five-year ratio increased to 104.2% from 98.9% at the start of the year. The 10-year ratio jumped to 104.9% on Monday from 96.4% at the start of 2012.
The 30-year muni continues to look expensive as the ratio has dropped to 101% from 119.4% at the beginning of the year.
Credit spreads have widened slightly throughout the month as supply has outweighed demand and muni yields have risen. The 10-year triple-A to single-A spread widened to 71 basis points on Monday from 70 basis points where it started the month. Similarly, the 30-year spread widened to 73 basis points from 72 basis points at the beginning of September.
Still, spreads have compressed sharply from the beginning of the year. The 10-year spread compressed from 96 basis points at the beginning of the year. The 30-year spread came in from 89 basis points on Jan. 3. While the five-year spread is flat for the month of September, it has compressed to 53 basis points from 82 basis points at the start of the year.
