Tax-exempts were weaker for the third consecutive trading session as few new deals and a lack of enthusiasm in a holiday-shortened week provided little impetus to move the municipal market higher.
As munis weakened over the last three sessions, yields jumped two to five basis points higher, with the majority of the price cuts hitting the belly of the curve.
“Munis are steady and trading activity is slow,” a New York trader said Monday.
Others agreed. “There is not much of a direction right now,” a Chicago trader said. “Everyone is staring at Friday knowing they are unlikely to even be at their desks.”
There is not a lot of new-issue supply to provide direction this week and some may recall last year’s muni mutual fund sell-off, he said. “There is also the possibility of outflows that could be coming from customers,” the trader said. “People remember a year ago and the sell-off was driven by outflows. And now, we are seeing record inflows, but if we go into a situation where there are dramatic outflows, it will negatively impact the market.”
The rally at the beginning of last week recouped all losses from the sell-off two weeks ago, he said. Week over week, yields inside 2025 were two to 10 basis points lower on March 30 compared to March 23. Outside 14 years, yields were unchanged to one basis point lower.
“So, on a total return basis, is the investor best rewarded in the tax-free muni bond market?” the Chicago trader said. “I think most participants would say no. There are better growth prospects elsewhere.”
To be sure, a deal priced in the primary market Monday was received well and pushed up a day ahead of schedule.
Bank of America Merrill Lynch priced $1 billion of New Jersey Economic Development Authority cigarette-tax revenue refunding bonds, rated Baa1 by Moody’s Investors Service and BBB-plus by Standard & Poor’s and Fitch Ratings. Institutional pricing was expected to come Tuesday after a Monday retail period, but the entire deal was priced Monday.
Yields ranged from 0.90% with a 5% coupon in 2013 to 4.48% with a 5% coupon in 2029. Bonds maturing in 2012 were offered via sealed bid.
Two of the four series of bonds maturing in 2022 and 2027 were insured by Assured Guaranty Municipal Corp. The insured credits yielded 3.56% with a 5% coupon in 2022 versus the naked bonds, which yielded 3.81% with a 5% coupon in 2022. Insured credits maturing in 2027 yielded 4.13% with a 4% coupon, versus the uninsured that yielded 4.38% with a 4.25% coupon in 2027.
In the overall market Monday, munis were weaker, according to the Municipal Market Data scale. Yields inside six years were steady while the seven- to 14-year yields rose one and two basis points. Outside 15 years, yields were flat.
On Monday, the two-year yield finished steady at 0.36% for its 11th consecutive trading session while the 30-year yield closed flat at 3.39%. The 10-year yield jumped two basis points to 2.13%.
Treasuries strengthened with yields falling one basis point across the curve. The two-year yield fell one basis point to 0.33%, the benchmark 10-year yield dropped one basis point to 2.21%, and the 30-year yield fell one basis point to 3.35%.
Data compiled by Markit also showed munis were weaker. In a sample of five CUSIP numbers, yields on four of the bonds rose, including Massachusetts general obligation 5.25s of 2021, Tennessee’s Metropolitan Government of Nashville and Davidson County GO 5s of 2023, New Prague, Minn., Independent School District GO 3s of 2017, and San Antonio Water System 5s of 2026.
But over the past week, trades in the secondary market reported by the Municipal Securities Rulemaking Board showed firming.
A dealer sold to a customer Mississippi 5s of 2036 at 3.42%, 11 basis points lower than where they traded a few days before. A dealer bought from a customer Los Angeles Community College District 6.75s of 2049 at 4.85%, 10 basis points lower than where they traded the week before.
A dealer sold to a customer Illinois 5.1s of 2033 at 5.46%, eight basis points lower than where they traded last Friday. Another dealer sold to a customer Utah Associated Municipal Power Systems 5s of 2024 at 3.39%, four basis points lower than where they traded last week.
Looking at the first quarter, muni-to-Treasury ratios fell as munis outperformed and became relatively more expensive. The five-year ratio fell to 94.2% on March 30, from 98.9% at the beginning of the year. The 10-year ratio fell to 95.5% from 96.4%. The 30-year ratio dropped to 101.5% at the end of March from 119.4% in the first trading session of January.
But when looking only at March, the ratio of muni yields to Treasuries rose as munis underperformed and became comparatively cheaper. The five-year ratio jumped from 77.3% at the beginning of March to 94.2%, while the 10-year ratio rose from 93.4% to 95.5%.
Throughout March and the first quarter, the slope of the yield curve has flattened. The 10- to 30-year slope fell to 128 basis points on March 30 from 138 basis points at the beginning of the March. It has dropped much more from the beginning of the year, when it started out at 169 basis points.