Demand in the municipal market continued to match supply as the tax-exempt market extended its streak of steady to lower yields on Thursday.
While the rally so far this week hasn’t come close to the rally the market experienced the previous week, yields did fall across the curve. The 30-year yield set a new record low almost every day this week and closed at its new record low on Thursday.
Traders said the market was busy earlier in the week, but started to show signs of slowing by Thursday afternoon as the new-issue market wound down. “It was kind of busy earlier,” a New York trader said. “But now not so much.”
Munis ended steady to firmer Thursday, according to the Municipal Market Data scale. Yields inside 11 years were flat while yields outside 12 years fell one basis point.
On Wednesday, the two-year yield closed flat at 0.31% for the fourth consecutive session. The 10-year yield finished steady at 1.73% for the fourth session, closing six basis points above its record low of 1.67% set Jan. 18. The 30-year yield fell one basis point to 2.90%, setting a record low as recorded by MMD. The previous record was 2.91% set Wednesday.
Thursday marked the 19th consecutive trading session where munis have traded steady or firmer. Since this most recent rally began on June 22, yields on the 10-year have fallen 13 basis points while the 30-year yield has plunged 26 basis points.
The Treasury yield curve steepened as yields on the short end fell while yields on the long end rose. The two-year yield fell one basis point to 0.22% while the benchmark 10-year yield and the 30-year yield each jumped three basis points to 1.52% and 2.62%, respectively.
In the primary market, JPMorgan priced $539.9 million of Miami-Dade County Transit System sales surtax revenue bonds, rated A1 by Moody’s Investors Service, AA by Standard & Poor’s, and AA-minus by Fitch Ratings.
Yields ranged from 0.70% with 3% and 4% coupons in a split 2015 maturity to 4.03% with a 4% coupon and 3.65% with a 5% coupon in a split 2042 maturity. The bonds are callable at par in 2022.
RBC Capital Markets priced $217.6 million of North East Independent School District, Texas, unlimited tax general obligation bonds, rated Aa1 by Moody’s and AA-minus by Standard & Poor’s. The bonds are backed by the Permanent School Fund Guarantee Program. Prices were not available by press time.
JPMorgan priced $158.7 million of triple-A rated Harris County, Texas, tax and subordinate lien revenue refunding bonds. Yields ranged from 1.64% with 3% and 5% coupons in a split 2020 maturity to 2.90% with a 5% coupon in 2032. The bonds are callable at par in 2022.
In the secondary market, trades compiled by data provider Markit showed firming. Yields on California Health Facilities Financing Authority 4s of 2021 and Los Angeles Community College District 6.75s of 2049 each fell two basis points to 2.12% and 4.45%, respectively.
“The California market continues to show strength independent of some trades in Fresno,” an analyst at Markit said.
Elsewhere in the secondary, yields on New York Liberty Development Corp. 5s of 2040 and Katy, Texas, Independent School District 5s of 2029 each dropped two basis points to 3.36% and 2.60%. Yields on Massachusetts Water Resources Authority 5s of 2028 and North Texas Municipal Water District 5s of 2029 fell one basis point each to 2.52% and 2.65%.
Since the most recent rally began on June 22, ratios have risen on the short and intermediate part of the curve as munis underperformed Treasuries. Munis rallied, but lagged the Treasury rally. The five-year muni-to-Treasury ratio rose to 114.5% on Thursday from 105.3% on June 22. The 10-year ratio increased to 113.8% from 111.4%.
Ratios on the long end fell as munis outperformed their taxable counterparts. The 30-year ratio fell to 110.7% on Thursday from 114.9% on June 22.
The slope of the yield curve has flattened since the beginning of the year and continued that trend since June 22. The one- to 30-year slope flattened to 270 basis points on Thursday from 296 basis points. The one- to 10-year slope flattened to 153 basis points from 166 basis points on June 22.
While the municipal market has been able to support recent increased supply due to demand coming from reinvestment money, not all analysts agree that demand can continue. After Aug. 1, the seasonal heavy reinvestment period will slow, but supply is expected to remain elevated.
“New issue volume is being held at very high levels by current and near-current refundings,” wrote muni analysts at Citi. “As a consequence, net new supply should move well into positive territory for the period August through October, before turning negative again as redemptions spike. As the same time, of course, the sectors that typically pour cash back into the market as redemptions spike will have far less new cash to put to work.”
The analysts added those two factors will contribute to the muni market struggling after Aug. 1. “The bad news is that valuations of existing holdings could come under pressure, and issuers could face a somewhat higher cost of financing,” they wrote. “The good news is that the large number of investors who have become increasingly frustrated by the continuing decline in muni yields maybe experience a respite from that decline, and possibly even a reversal of the drop in credit spreads.”