NEW YORK – The tax-exempt market ended the week on a weaker note, with yields rising slightly Thursday and Friday after a double digit rally earlier in the week. Overall, traders said the primary market saw very good reception due to the limited supply, and expect that to continue going into next week.
“It almost feels like a false bounce and a touch fabricated,” a Chicago trader said about the big rally earlier this week. “It seems suspect. There was a grab fest earlier in the week and then people wanted to sell and couldn’t. A lot of people are still questioning where we are at and this is one of the hardest environments I’ve ever seen.”
He added that yield compression and yields trading record lows for so long has made trading difficult. “Fortunately the yield curve is steep enough where you can make some money.”
“It’s a little busy,” a New York trader said Friday. “Munis aren’t up, but it’s just a little more busy.”
In the primary market, the Chicago trader said new deals this week went well and next week should do fine too, despite heightened supply. “There is a huge demand for yield and there is demand for anything different than the six or seven names we see in the street every day.”
Munis were mixed in the latter portion of the week when compared to earlier, according to data compiled by Markit. On Tuesday, all CUSIP numbers out of a sample of 11 were stronger, but by the end of the week, munis were not as strong. On Wednesday, two out of a sample of eight CUSIP numbers were weaker, while three out of eight were weaker on Thursday.
By Friday, two out of eight had declined, including Ohio 5s of 2022 and Tampa, Fla., Water and Sewer Systems 5s of 2024.
Munis were weaker Friday, according to the Municipal Market Data scale. Yields inside six years were steady while the seven-year yield rose one basis point. Outside eight years, yield jumped two basis points.
On Friday, the two-year yield finished steady at 0.36% for its tenth consecutive trading session. The 10-year yield and the 30-year yield each jumped two basis points to 2.11% and 3.39%.
Treasuries were much weaker Friday. The benchmark 10-year yield jumped five basis points to 2.22% while the 30-year yield spiked up eight basis points to 3.36%. The two-year was steady at 0.34%.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening over the past weeks and month.
A dealer sold to a customer New Mexico Hospital Equipment Loan Council 5s of 2039 at 4.20%, 39 basis points higher than where they traded two weeks before.
A dealer bought from a customer Utah 5s of 2016 at 0.85%, 28 basis points higher than where they traded earlier in March.
A dealer sold to a customer Alabama Public School and College Authority 5s of 2022 at 2.48%, 11 basis points higher than where they traded earlier in March.
A dealer bought from a customer Los Angeles Unified School District 4.5s of 2024 at 2.90%, one basis point higher than where they traded earlier in the week.
Over the last week, muni-to-Treasury ratios rose as muni underperformed Treasuries and become comparatively cheaper. The five-year muni yield to Treasury yield ratio jumped to 97% on Thursday from 93.6% the week prior. The 30-year ratio increased to 103.1% from 102.7%.
The 10-year ratio was about flat from the week prior, falling slightly to 96.8% on Thursday from 96.9%.
The 10- to 30-year slope jumped over the past week, rising to 128 basis points on Thursday from 123 basis points. The slope is still relatively flat from when it started the year at 169 basis points.
Looking to next week, the tax-exempt market can expect $5.78 billion in bonds, up from this week’s revised $4.34 billion. On the negotiated calendar, $4.06 billion is expected, up from this week’s revised $3.49 billion. In competitive deals, $1.72 billion is expected next week, up from this week’s revised $849.2 million.
