The tax-exempt market posted its third consecutive week of gains as yields fell as much as nine basis points on municipal bonds.
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The 10-year Municipal Market Data triple-A benchmark yield fell six basis points for the week through Thursday to 2.54%, the lowest since June 20, when the 10-year closed at 2.58%. The 30-year yield slid nine basis points for the week through Thursday to 4.11%, the lowest since July 18 when the yield finished at 4.03%.
The 10-year Municipal Market Advisors yield declined five basis points for the week to 2.70% and the 30-year yield fell six basis points to 4.25%.
Much of the demand came in the primary market this week as the two largest deals — $2.6 billion of Regents of the University of California and $1 billion of New York City bonds — were very well received.
“We are definitely seeing the primary capture a lot of the interest, especially in California and other specialty states” like New Jersey, New York, and Massachusetts, said Dawn Mangerson, senior portfolio manager of the municipal client group at McDonnell Investment Management. “Everything is oversubscribed there.”
She said much of the demand in the $2.6 billion University of California deal came because munis are cheap relative to Treasuries. “People are waking up to the fact that in general, munis are cheap, especially for California residents with the higher tax rates. So we are definitely seeing interesting in California.”
In the secondary market, cheaper deals can be found in longer maturities, Mangerson said. “We are looking at everything in the market from odd lots to large blocks and we’ve been able to get some things done this week. I’m getting large-sized purchases done in the secondary further out on curve,” adding she has more buying power outside 10 years.
In general, cheaper deals for buyers can be found outside of 10 years as buying shorter-maturing bonds has been a crowded trade for most of the year. During “the year as a whole the market has backed up, but really throughout that it’s been characterized by decent demand inside of 10 years,” said James Grabovac, senior portfolio manager at McDonnell. “And with mutual fund redemptions, the yield curve has steepened. But in the past couple weeks, the market has found a bid and the curve has flattened.”
Over the past week, demand for municipal bonds was much stronger after the Federal Open Market Committee meeting Sept. 18 and its decision not to taper its $85 billion a month bond purchasing program. “The Fed decision was a catalyst but it seemed like the market had just gotten cheap enough,” Grabovac said. “We have stability now and investors have reason to get back into the market, and that sparked some movement on the demand side.”
This week’s lack of negative headlines out of Detroit and Puerto Rico also helped provide some calm. “It’s gives people comfort that you’re seeing trades in Puerto Rico and Detroit,” Mangerson said. “There is some liquidity for those names. Not at the levels people like, but there is movement.”
Still, momentum should be positive as light new issuance is expected to continue next week and outflows — while still negative for the 18th consecutive week — slowed to $159 million from the previous week’s $1.1 billion.
