Market Close: Despite Firm Ending, Munis Underperform in March

The tax-exempt market ended the last trading session of March on a stronger tone with yields on municipal bond benchmark scales falling as much as two basis points Thursday.

Bond markets are closed on Good Friday.

Thursday morning, traders said there was a flurry of activity ahead of a quiet afternoon. “It’s busy,” a New York trader said, adding traders were rushed to get deals done ahead of the long weekend.

Yields on the Municipal Market Data triple-A GO scale ended as much as two basis points lower. The 10-year and 30-year yields closed steady at 1.91% and 3.09%, respectively. The two-year finished flat at 0.31% for the 28th consecutive session.

Throughout the course of March, yields rose on what has been a historically tough month for munis. The 10-year MMD yield rose 10 basis points from 1.81% on Feb. 28 to 1.91% on March 28. The 30-year yield jumped 18 basis points from 2.91% on Feb. 28 to 3.09% on March 28.

Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale ended as much as one basis point lower. The 10-year and 30-year yields finished flat at 1.96% and 3.19%, respectively. The two-year held at 0.33% for the 23rd straight session.

Throughout the course of March, the MMA 10-year yield jumped 13 basis points from 1.83% on Feb. 28 to 1.96% on March 28. The 30-year yield climbed 20 basis points from 2.99% to 3.19%.

On Thursday, Treasuries ended mostly flat. The two-year was steady at 0.25% while the benchmark 10-year yield was steady at 1.85%. The 30-year yield increased two basis points to 3.11%.

March is a historically weak month for munis and that showed through in ratios. Ratios increased on the short and intermediate part of the curve as munis underperformed Treasuries and became relatively cheaper.

The five-year ratio jumped to 109.1% on March 28 from 101.3% on March 1. The 10-year ratio also increased to 103.2% from 96.2% at the beginning of the month. Similarly, the 30-year ratio jumped to 99.4% at the end of the month from 94.8%.

While some analysts believe March has lower performance because of tax season, others attribute softness from low redemptions and an increase in issuance.

“A more important factor in terms of seasonal effect is the structural pattern of bond issuance and redemptions, which creates a large mismatch between supply and demand,” wrote Thomas Weyl in a Barclays research note. “On average, March and April display the largest mismatches between supply and redemptions, with May tied for the third-worst month.”

He added that the mismatch of supply and redemptions on average is $19 billion for March and $14 billion for April. Those mismatches are well above the average fund inflows for $1.5 billion in March and $0.5 billion in April.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER