Municipal investors were on the sidelines this week, perplexed and uncertain about what their next move should be.
“The main theme playing out is an aversion to buying munis at absolute low rates,” said Michael Zezas, municipal strategist at Morgan Stanley. “Most market participants are still not willing to commit to yields, so to the extent that they can stay on the sidelines, they are.”
The Bond Buyer’s 20-bond GO index of 20-year general obligation bond yields jumped five basis points this week, following a 26-basis-point spike a week before. It now sits at 4.14%, a four-week high.
Prior to those lifts, the index had nosedived 64 basis points over three weeks to 3.83%, its lowest since October.
The Bond Buyer’s 11-bond GO index of higher-grade 20-year GO bonds moved up five basis points to 3.86%, also a four-week high.
It too had jumped 26 basis points the week before, reversing a 64-basis-point plunge in the previous three weeks. The rapid drop had left the index at its lowest since April 1967.
“These low rates are probably pulling some demand back,” said Richard Ciccarone, chief of research at McDonnell Investment Management.
Ciccarone noted that muni buyers might not like low yields, but they remain convinced of their credit quality. Negative headlines remain centered on a few names, like Harrisburg, Penn., Jefferson County, Ala., and Central Falls, R.I., and these have all been around awhile. “We’re not seeing surprise credit situations,” he said.
While munis weakened, Treasuries strengthened. The 10-year and 30-year Treasury yields each dropped nine basis points in the week to 2.14% and 3.51%.
Tim Coffin, vice president at Fidelity Capital Markets, noted a split in the muni buyer base. Individual investors are distracted by broader volatility and suffering from sticker shock, but professionally managed accounts have been active buyers.
“They recognize the relative value in munis versus other credit markets,” Coffin said of the pro accounts. “We think that’s going to continue as long as munis keep these ratios to Treasuries.”
The 10-year and 30-year muni-to-Treasury ratios finished the week at 104.7% and 110.9%, respectively. At mid-August they were 99.1% and 103.7%. The Bond Buyer’s revenue bond index, which measures 30-year revenue bond yields, continued to rise at a slower pace. It climbed two basis points this week, and three the last, to 5.15%. It’s also perched at a four-week high, whereas three weeks ago it was at its lowest level since early November.
Zezas said light trading could be a result of short-staffing issues and vacation time, not just distaste for low yields.
“The market is still catching up to the difference between where risk-free yields were in July, versus where they were in August after the growth scare,” Zezas said.
Finally, the weekly average yield to maturity on The Bond Buyer’s 40-bond muni index, which is based on prices for 40 long-term muni issues, advanced two basis points this week to 5.08%.
