The tax-exempt market continued its losing streak for the fifth consecutive trading session as munis weakened under the pressure of a heavy primary calendar.
“The market is weaker ahead of the calendar,” a New Jersey trader said. “Secondary activity is a little light from our perspective and I think the fall-off in Treasuries is affecting us to an extent. It doesn’t take much for our market to drift off and we don’t have the liquidity. So when Treasuries back off, we feel it and bids tend to dry up.”
The market will handle the hefty calendar, but at a price — and that is not necessarily a bad thing, the trader said. “The market is waiting for a readjustment and buyers have cash on hand but are reluctant to spend it. We’ve seen good inflows into bond funds over the past several weeks, but most are reluctant to pay these prices and accept miniscule yields. So the correction will get interest and the calendar this week will help that.”
Others agreed that secondary activity had stalled by Monday afternoon. “Items that had 20 bids two weeks ago now have five,” a New York trader said. “The entire market seems to be driven off of how well these new issues are received. There is a lot of money headed toward a more confident equity market, and it should be interesting to see how rates in general react.”
“The market is still kind of weak,” a second New York trader said. “There is a little bit of a bid side, but there is so much supply coming.”
Munis were weaker Monday, according to the Municipal Market Data scale. Yields inside three years were steady while the four- to six-year yields rose three basis points. Yields outside seven years jumped two basis points.
On Monday, the two-year yield finished steady at 0.36%. The 10-year and 30-year yields each rose two basis points to 2.28% and 3.46%, respectively.
Since munis started weakening last Tuesday, the two-year yield jumped nine basis points while the 30-year yield increased 17 basis points. The 10-year yield got hit the hardest, rising 26 basis points.
The two-year yield has not been this high since Jan. 11, while the 30-year yield hasn’t risen to this level since Jan. 6. The 10-year muni hadn’t seen these levels since Nov. 17, 2011.
While the rise in yields has taken the market off its record lows, yields are still low enough to keep refundings in the market, the New Jersey trader said. “I wouldn’t say refundings are off,” he said. “The rising yields have an impact but we still have a little ways to go before the market really gets impacted substantially. There is still a number of refunding opportunities.”
Treasuries were much weaker Monday. The two-year yield rose two basis points to 0.40%. The benchmark 10-year yield and the 30-year yield each jumped nine basis points to 2.38% and 3.49%.
In the primary market, JPMorgan priced for retail $521 million of San Antonio taxable electric and gas systems revenue bonds, rated Aa1 by Moody’s Investors Service, AA by Standard & Poor’s, and AA-plus by Fitch Ratings. Pricing details were not available by press time.
Muni-to-Treasury ratios fell as municipals outperformed Treasuries and became relatively more expensive. Since munis began weakening last Tuesday, the five-year ratio fell to 84.7% from 86.8% at the start of the week. The 10-year ratio fell to 98.7% from 99.5%. The 30-year ratio fell to 101.2% from 103.8%.
Since the beginning of the year, the short- and long-end of the curve has become very expensive. The five-year ratio started the year out at 98.9% while the 30-year ratio opened at 119.4%. The 10-year ratio is around the same level as it was in the beginning of the year at 96.4%.
Despite rising rates, the 10- to 30-year slope of the curve has continued to collapse as investors go further out in search for yield. Last week, the slope fell to 118 basis points from 127 basis points the week before. The slope has compressed from 169 basis points at the beginning of the year.
Investors have also moved down the credit curve in search for yield. Triple-A to single-A credit spreads have compressed across the curve. The two-year triple-A to single-A spread fell to 39 basis points from 43 basis points the week prior. The 10-year triple-A to single-A credit spread fell to 80 basis points from 86 basis points the week before. The 30-year spread held steady at 80 basis points.
Trades reported by the Municipal Securities Rulemaking Board showed weakening over the past few days and over the last month.
A customer sold to a dealer Missouri Highways and Transportation Commission 5s of 2017 at 0.98%, 24 basis points higher than where they traded in February. A customer bought from a dealer Port of Seattle 5s of 2033 at 3.52%, 20 basis points higher than where they traded the previous month.
A customer sold to a dealer Cook County, Illinois 5s of 2013 at 0.83%, 13 basis points higher than where they traded Friday. Another customer sold to a dealer San Diego Unified School District 5s of 2029 at 0.40%, eight basis points higher than where they traded in February.
Prices have been cut across the curve and analysts at Morgan Stanley Smith Barney agree it may not be over yet.
“The municipal bond market has had a rough ride with price weakness specific to the asset class transpiring at a rapid pace in the face of year-to-date record new-issue supply,” wrote John Dillon, chief municipal bond strategist.
“We now believe that the bulk of the near-term price adjustments have been realized,” he said. “That said, we now anticipate that further muni specific price adjustments will be incremental in nature as the marketplace continues its recalibration to a weekly new-issue supply environment that may reside slightly above the $6 to $8 billion of what we could consider a normal healthy flow of $5 to $7 billion.”
