The tax-exempt market finished stronger for the seventh consecutive trading session as demand outweighed supply and yields fell further, closing in on record low territory set late July.
Traders said the supply and demand imbalance is not expected to change in the near future. “We are stronger and I think we are going to get stronger,” a Chicago trader said. “There is not much supply coming in and all of a sudden if you want bonds, you have to pay the price and push it up a bit.”
He added there is not a large amount of reinvestment money coming due, but there will be a small amount, creating an even bigger divide between supply and demand.
Yet as yields fall, many traders noted that activity stalls with it as disenchantment over low yields sets in.
“The market is up again and it’s annoying,” a New York trader said, adding that activity generally slows down when yields fall. “With lower rates, people just don’t care.”
He continued that as yields approach and trade around these lows, it’s hard to make money. “It’s a limited return.”
Another trader seemed to agree with that and said the market had slowed down. “Trying to get a bid on anything is an exercise,” one trader tweeted. “It feels like I came into work on a Sunday by mistake and I haven’t figured it out yet.”
One bigger piece of news to hit the muni bond market was the downgrade of Illinois’ general obligation rating to A from its previous A-plus rating by Standard & Poor’s. The rating agency cited pension liabilities and an ongoing structural budget deficit as main causes of the downgrade.
Reaction was mostly muted, according to traders, cautioning that it is a low volume trading week so there could be more fallout next week when many market participants return to work. But so far, Illinois debt was not weaker in Thursday trading.
“Illinois GO paper is holding up given the downgrade,” an analyst at data provider firm Markit said. “Keep in mind that supply and trading is light with the upcoming holiday.”
Another trader agreed. “It’s not a big deal,” the Chicago trader said. “It was expected.”
On Thursday, the 10-year Municipal Market Data yield and the 30-year yield fell one basis point each to 1.74% and 2.89%, respectively. The two-year closed at 0.29% for the 26th consecutive session.
Munis have seen mixed results throughout the month of August — weakening in the first few weeks and posting strong gains in the latter portion of the month that erased almost all those losses. Over the past seven trading sessions, the 10-year yield has plummeted 16 basis points while the 30-year yield has plunged 13 basis points.
The 10-year MMD yield now trades only 14 basis points above its record low of 1.60% set July 26 and the 30-year yield hovers 10 basis points above the 2.79% record low set July 25.
Treasuries were stronger Thursday, erasing Wednesday’s losses. The benchmark 10-year yield dropped three basis points to 1.63% while the 30-year yield fell two basis points to 2.75%. The two-year yield closed down one basis point at 0.27%.
In the secondary market, trades compiled by Markit showed firming. Yields on Illinois’ Railsplitter Tobacco Settlement Authority 5.25s of 2020 and Michigan Finance Authority 5s of 2018 plummeted six basis points each to 2.80% and 1.06%, respectively.
Yields on Massachusetts 5.5s of 2023 fell four basis points to 2.16%. Yields on University of Texas 5s of 2026 and Broward County, Fla., Airport System 5s of 2020 dropped two basis points each to 2.25% and 2.20%, respectively.
In other muni bond news, Moody’s Investors Service announced several weeks ago it planned to review all California municipalities in light of the recent local bankruptcies, and the review could lead to across-the-board downgrades.
In response, traders at Wells Fargo Advisors say California municipalities have been affected by downgrades and could be impacted by the Moody’s review.
“Bonds of California municipalities that have experienced significant downgrades or have filed for bankruptcy immediately trade 100 to 150 basis points higher than their previous market levels,” the trader noted. “Because the market has already seen spreads widen on San Bernardino, San Jose, and Stockton, it is possible that cities Moody’s focuses its September reports on could experience the same treatment once the reports are released.”
Patrick Early, chief municipal analyst at Wells Fargo, noted that potential widespread rating downgrades for California could push some municipality ratings to junk status. But, many of those rating adjustments could be based on Moody’s view of the overall landscape of California, and not based on the specific credit of an issuer.
“The financial condition for many of the affected issuers will not have materially changed even though the rating was downgraded,” Early wrote. “Bondholders should be more concerned with the stressed municipalities in which Moody’s conducts in depth reviews and releases details reports. It is likely any downward rating action taken on these municipalities is due to genuine credit concerns with the specific issuer instead of general concerns with the state as a whole.”
