NEW YORK – The tax-exempt market ended stronger Thursday as a flight to safety, led by Treasuries, buoyed municipals. Overall for the week, larger deals were received well despite yields ending up for the week.
“The market is feeling better,” a Chicago trader said Thursday. “I’m not sure it’s as good as some of the bumps the Municipal Market Data scale is showing but the trades that happened earlier today were strong. If it is that strong, I need to mark up my paper and I’d be happy to sell it going into the weekend.”
That said, the trader said he is seeing yields fall one to two basis points, but not any more than that. “The high end stuff is selling more aggressively, but I did see some new issue stuff trading behind where it came in Wednesday. And granted, it wasn’t the best of names, but it wasn’t the worst either.”
A New York trader added trading activity was up on Thursday. “We had a big pop,” he said. “Treasuries were higher so munis were two to four basis points higher in the secondary,” he said, referring to prices. “But really the beginning of this month has not been terribly exciting.”
In the primary market, he said the larger deals have been received well this week, but smaller competitive deals struggled to find sponsorship. “The larger deals got pretty strong bids, with the bigger shops winning,” he said. “Less than $75 million deals seemed to have a harder time getting dealers’ attention. I know of at least one deal that was pulled because the high bid didn’t meet the issuers refunding savings target.”
Munis were stronger Thursday according to data compiled by Markit. Six of seven CUSIP numbers showed firming with yields falling three to 14 basis points, including Ohio 5s of 2023, San Francisco 5s of 2019, Port Authority of New York and New Jersey 5.859s of 2024, and Arizona Board of Regents 4s of 2037.
Munis were stronger Thursday, but yields were still up for the week, according to the MMD scale. For the week, yields ended up one basis point on the 10-year and three basis points on the 30-year.
On Thursday, the two-year yield finished steady at 0.36% for its 14th consecutive trading session while the 30-year yield finished flat at 3.42% for its third trading session. The 10-year yield closed down four basis points at 2.12%.
Treasuries had a big rally and yields ended down for the week. On Thursday, the benchmark 10-year yield dropped six basis points to 2.18% while the 30-year yield fell four basis points to 3.33%. The two-year was steady at 0.35%.
Over the past week, muni-to-Treasury ratios fell as munis outperformed Treasuries and became comparatively more expensive. The five-year muni yield to Treasury yield fell to 93.3% from 97% the week prior while the 30-year ratio dropped to 101.2% from 103.1%. The 10-year ratio fell slightly to 96.4% from 96.8% the week before.
Over the course of April, the slope of the yield curve has flattened. The 10- to 30-year slope fell to 126 basis points from 128 basis points at the end of March. And while the long-end of the curve has flattened, the entire slope has steepened in April with the one- to 30-year slope increasing to 324 basis points from 321 basis points at the end of March.
With general market consensus showing that rates are expected to stay low for an extended period of time, muni participants are moving down in the credit scale to reach for yield. Spreads between triple-A and single-A credits have compressed across the curve since the beginning of the year.
The two-year triple-A to single-A spread plummeted to 39 basis points from 56 basis points at the beginning of the year. The 10-year spread dropped to 78 basis points from 96 basis points in January. The 30-year triple-A to single-A spread fell to 78 basis points from 89 basis points.
Looking to next week, the tax-exempt market can expect $7.68 billion in new issuance, up from this week’s revised $5.12 billion. On the negotiated calendar, $6.16 billion is expected, up from this week’s revised $3.22 billion. In competitive deals, $1.52 billion is expected, up from this week’s revised $1.9 billion.
