The big story in the municipal market this holiday-shortened week was the Treasury market.
Concerns about the euro zone hit Treasury yields a lot harder than any other factor moved their muni cousins. Municipal bond yields have fallen modestly on the week on the intermediate and long ends of the curve.
Treasury yields in those parts of the curve, by comparison, have plummeted. Industry pros say the market has about reached its floor, with the triple-A 30-year yield dropping to within three basis points of its record low of 3.05%, set in mid-May.
Investors won’t follow munis to Treasury-level yield lows. New deals are being absorbed with modest drops to yields in an abbreviated week.
Muni bond indexes largely mirrored the Municipal Market Data scale on the week, with a stagnant two-year yield and falling 10- and 30-year yields.
The Bond Buyer’s 20-bond index of 20-year general obligation yields declined four basis points this week to 3.77%, but it remained above its 3.75% level from two weeks ago.
The 11-bond index of higher-grade 20-year GO yields also dropped four basis points this week to 3.56%, but remained above its 3.53% level from two weeks ago.
The yield on the U.S. Treasury’s 10-year note declined 20 basis points this week to 1.58%, which is its lowest level since the 1950s. The yield on the Treasury’s 30-year bond dropped 19 basis points this week to 2.67% — its lowest level since Dec. 23, 2008, when it was 2.62%.
Muni underperformance does not speak to any weakness in the market, according to David Manges, managing director of municipal trading at BNY Mellon Capital Markets. Rather, it speaks to the fact that supply-demand dynamics aren’t the sole driver of the muni market.
“This is a Treasury rally, and a staggering one, to boot,” Manges said. “This is not a muni story. It’s a post-holiday week — it’s a light calendar and there’s limited activity. The absolute level of rates is keeping a lot of buyers on the sidelines.”
The fact that muni yields are moving at all can be attributed to how the market’s ratios to Treasuries have widened to such a significant degree, he said.
There is some amount of crossover buying occurring.
“But any movement in our market is just a shadow of what’s happening in the Treasury market,” he said.
Ratios across the curve have risen around eight percentage points on average since last Friday, all to levels above 112%. Muni underperformance again in Thursday’s session brought the 10-year to 114%, the highest level in six months.
The 30-year hit 116%, while the two-year held at 122%. The cause of increasing ratios is less clear, Alan Schankel of Janney Capital Markets wrote in a market post.
“Although jammed into a holiday-shortened week, the week’s calendar is a manageable amount,” he wrote. “Continued concerns about Europe along with a weak pending home sales number explain strong Treasuries, but not lagging munis.”
The revenue bond index, which measures 30-year revenue bond yields, fell three basis points this week to 4.73%. That is its lowest level since May 10, when it was also 4.73%.
The Bond Buyer’s one-year note index, which is based on one-year GO note yields, was unchanged again this week at 0.24%, which is still its lowest level since April 18, when it was 0.23%.
The weekly average yield to maturity of The Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, remained unchanged at an all-time low of 4.39%. It is the second consecutive record low for the weekly average.