The tax-exempt market ended on a firmer tone Thursday as traders said it was the best trading session yet of the week.
The market traded weaker through most of the last few trading sessions, but the bid-side felt stronger Thursday, following Treasuries, traders noted.
By Thursday afternoon, the benchmark 10-year Treasury fell back down to 2.00%, helping give direction to munis.
“A few bids were slightly weaker, but it’s nothing too significant,” a New Jersey trader said. “Any changes this week are much more noticeable in the primary market. Not so much in the secondary.”
In the primary market, this trader said that munis were only a few basis points weaker overall. “If Treasuries continue to climb for a prolonged period of time, munis may be affected. But there probably is not much movement until then.”
The lack of supply has driven activity down, he continued. “When there is more supply, munis are more sensitive to Treasury movements. But when supply is still this low and people are starving for munis, they tend to stay put despite Treasuries moving a few basis points here or there.”
Other traders agreed the market felt better Thursday than it had in previous trading sessions this week, though they added activity was subdued.
“I haven’t really seen enough trades to know today,” a Chicago trader said. “There is not a lot of activity. I’d say it’s stronger than Wednesday but as far as demand goes, it’s not all that hot.”
He added that the bid side has a better tone but trading activity has been lackluster throughout the past week. “It goes back and forth between we’re too high on everything we bid or bids are way through where we’re at and they don’t trade anyway. We are in a deadlock.”
In the primary market Thursday, Morgan Stanley priced $111.2 million of Illinois Finance Authority revenue bonds, rated Aa2 by Moody’s Investors Service and AA-plus by Standard & Poor’s.
Yields ranged from 3.51% with a 4% coupon in 2033 to 3.52% with a 5% coupon in 2042. The bonds are callable at par in 2022.
Morgan Stanley priced $93.7 million of triple-A rated Fairfax County, Va., Water Authority water refunding revenue bonds in two series.
Bond in the first series, $57.4 million of federally taxable bonds, were priced at par to yield from 0.35% in 2014 to 3.405% in 2030. The bonds had spreads ranging from 13 basis points to 140 basis points above the comparable Treasury yield. The credits are callable at par in 2023.
Yields on the second series, $36.3 million, ranged from 0.20% with a 2% coupon in 2014 to 2.73% with a 4% coupon in 2032. The bonds are callable at par in 2023.
In the competitive market, Ohio auctioned $261.7 million of general obligation bonds, rated Aa1 by Moody’s and AA-plus by Standard & Poor’s and Fitch Ratings.
Citi won the bid for the first pricing of $194.8 million of common schools GO refunding bonds. Yields ranged from 0.63% with a 5% coupon in 2016 to 2.30% with a 5% coupon in 2025.
JPMorgan won the bid for the second pricing of $66.9 million. Yields ranged from 0.80% with a 5% coupon in 2017 to 2.20% with a 5% coupon in 2024.
In the secondary market, trades compiled by data provider Markit showed mostly firming.
Yields on New Jersey Tobacco Settlement Financing Corp. 4.5s of 2023 plunged five basis points to 4.58% while New Jersey 5s of 2020 dropped three basis points to 1.60%.
Yields on Metropolitan Water District of Southern California 5s of 2026 and Port of Seattle, Wash., 5s of 2031 fell one basis point each to 2.13% and 2.95%, respectively. Yields on Mississippi 5s of 2021 also fell one basis point to 1.78%.
Municipal bond market scales finished steady to a few basis points stronger.
The Municipal Market Data triple-A GO scale ended flat to one basis point firmer. The 10-year yield fell one basis point to 1.84% while the 30-year yield finished steady for the second session at 2.92%. The two-year was steady at 0.32% for the fourth session.
The Municipal Market Advisors 5% coupon triple-A benchmark scale ended mostly steady, though some yields rose and some yields fell as much as two basis points throughout the curve. The 10-year yield finished steady at 1.87% while the 30-year yield closed flat at 2.99%. The two-year closed unchanged at 0.35% for the 14th session.
Treasuries closed stronger Thursday after two consecutive weaker sessions. The benchmark 10-year yield dropped three basis points to 2.00% while the 30-year yield fell five basis points to 3.18%. The two-year yield fell two basis points to 0.27%.
So far in February, muni-to-Treasury ratios have risen as munis underperformed their taxable counterparts and became relatively cheaper.
The five-year muni yield to Treasury yield ratio increased to 91.1% from 89.8% at the beginning of February.
The 10-year ratio rose to 91.6% on Thursday from 90.5% at the start of the month.
Similarly, the 30-year ratio rose to 90.4% from 89.1% on Feb. 1.
Still, munis have outperformed Treasuries since the beginning of the year and become relatively more expensive as ratios have fallen.
Since the start of 2013, the five-year ratio fell to 91.1% from 110.5%.
The 10-year ratio dropped to 91.6% on Thursday from 96.7% at the beginning of the year.
And the 30-year ratio slipped to 90.4% on Feb. 14 from 93.8% at the start of the year.