NEW YORK – The tax-exempt market ended stronger Friday after a steady to firmer tone all week.
In the primary markets, the biggest deals of the price were received well with deals being upsized and yields lowered in repricings. Secondary market activity picked up as the week progressed.
“We’ll trim off a couple more basis points today especially on the long end after non-farm payrolls today,” a New York trader said Friday. “Demand is definitely seen in the primary as these bigger deals get taken off of the table pretty rapidly.”
He added moving forward, credit spreads will be most interesting to watch. “I’m curious to see the point at which spreads widen again, if at all. The reach for yield is evident, even on the retail side of the market.”
Munis were firmer Friday, capping a week of steady to lower yields, according to the Municipal Market Data scale. Yields inside three years were steady while yields outside four years fell between two and four basis points.
On Friday, the 10-year yield fell three basis points to 1.82% while the 30-year yield dropped four basis points to 3.15%. The two-year yield closed flat at 0.31% for the 13th consecutive trading session.
For the week, the 10-year yield finished five basis points lower while the 30-year yield closed down 10 basis points. The two-year was steady from the week prior.
Treasuries gained Friday on lower than expected employment numbers. The benchmark 10-year yield dropped five basis points to 1.88% while the 30-year yield fell four basis points to 3.07%. The two-year yield finished steady at 0.27%.
In the secondary market Friday, out of a sample of nine CUSIP numbers compiled by data provider Markit, seven were firmer with yields falling one to four basis points.
Yields on Minnesota 5s of 2022 fell four basis points to 1.95% while Los Angeles 5s of 2018 dropped three basis points to 0.35%. Yields on Connecticut 5s of 2024 dropped two basis points to 2.35% while Pennsylvania State Turnpike Authority 5.25s of 2040 fell one basis point to 3.40%.
Over the course of the past week, muni-to-Treasury ratios have fallen as munis outperformed Treasuries and became more expensive. The 10-year muni yield to Treasury yield fell to 96.4% from 96.9% last Friday while 30-year ratio dropped to 102.2% from 104.2%. The five-year ratio held steady at 100%.
The slope of the yield curve dropped below 300 this week for the first time since February 2 when the slope hit 296 basis points. Prior to early 2012, the slope had not fallen below 300 basis points since 2008, according to MMD’s Bob Nelson.
On Thursday, the slope dropped to 299 basis points from 305 basis points a week prior. The slope has flattened significantly since the beginning of the year when it started at 332 basis points and has fallen even more dramatically from 458 basis points in February of 2011.
The 10- to 30-year slope of the curve also fell to 134 basis points from 138 basis points the week before. It has flattened from 169 basis points at the start of the year.
Looking to next week, the municipal market expects $6.06 billion in new deals, down from this week’s revised $6.55 billion. On the negotiated calendar, $4.18 billion is expected, down from this week’s revised $5.8 billion. In competitive deals, $1.88 billion is expected to come to market, up from this week’s revised $752.7 million.
In economic news Friday, non-farm payroll employment rose 115,000 in April as the unemployment rate fell to 8.1%. The 115,000 gain in April followed a 154,000 increase in March, while unemployment fell from 8.2% in March.
“Despite the perception that payrolls appear to be slowing because of the initial print, the three-month change in non-farm payrolls is modestly ahead of the 12-month change,” wrote economists at RDQ Economics. “Each of the last four payroll reports have revised the previously reported gain in private employment higher by an average of 45,000 per month. The unemployment rate also continues to decline as labor force participation dropped again in April.”
They added, “In short, through the volatility, the job market continues to expand and slack in the labor market continues to be reduced at a gradual pace. There is nothing here to persuade the Fed that it should be looking at the need for further stimulus.”