Municipal bonds rallied for a third straight day Thursday, following Treasuries as weak European economic data lessened investor concerns over interest rates in the U.S.
"People are focused on the possibly of easing in European banks," a New York trader said.
"People are being squeezed a bit and are thinking that rates are going up — that's been the attitude of the market the past few days. Economic numbers in Europe have not been that good."
Municipal bond yields on the intermediate part of the curve fell as much as five basis points, while yields on bonds maturing beyond 2039 slipped as much as four basis points.
The short end of the curve was unchanged, according to the Municipal Market Data's triple-A scale.
"Everybody is trying to figure out when we're going to see a backup in yields," according to a trader based in Chicago.
"People are frustrated with the market and are wondering when this rally is going to stop," the trader added. "There seems to be no sign of a back-off. Munis are just following suit of the Treasury rally and the lack of supply."
Treasuries in the long-end of the curve slid downthree basis points to 3.34%, which was the lowest level since June, making it the largest three-day rally in eight months.
The rally began soon after Italian, Spanish and Irish bonds fell as data showed that the euro-area recovery failed to take hold in the first quarter.
"If rates start moving higher later this year, as we expect, high-quality tax- exempts will have to substantially outperform Treasuries to protect bondholders," Citigroup wrote in a report released on Tuesday.
Historically, munis outperform Treasuries more in the first half of the year, according to the Citi report.
"In our view, muni ratios are still unattractive," the report said.
Citi said fair value for the ratio of the MMD triple-A scale and Treasuries is 84% for five-year maturities, versus 74% now; 90% for 10-year securities compared with 85% now, and 99% for 30-years, versus 96% now.
Though U.S. data showed that consumer prices increased, jobless-benefit claims dipped and regional manufacturing advanced, while Treasuries continued to strengthen. The 10-year benchmark slipped five basis points to 2.50% and the two-year note slid one basis point to 0.37%.
Trading activity has slowed, with no large deals scheduled for Thursday as the bulk of this week's new issue deals had already come to market. The secondary market has also seen fewer trades than Wednesday.
"Volume is light overall. It was hard to keep up yesterday, but there's not much trading going on today," a second Chicago trader said.
"I'm not sure if it's because everyone is trying to cash in on the rallying or if it's because people aren't getting the bids that they want. Activity is lower today than it's been."
According to Wells Fargo's municipal market update report, new-issue supply has averaged around $4.6 billion per week year to date, compared to a weekly new- issue average of $5.5 billion in 2013.
Tax-exempt new-issue supply is expected to total $4.9 billion this week, up from $3.4 billion last week.
Though there is a lack of supply, some investors are being finicky about which parts of the curve to buy into.
"People are being selective," a third Chicago trader said.
"Everyone wants high rates. Credit spreads are extra tight, which is somewhat dangerous if we get supply, which won't be for a while."
Some muni bond investors turned to the $1 billion New Jersey Turnpike Authority revenue bond deal that came earlier in the week.
"The New Jersey turnpike deal was gobbled up," the third Chicago trader said. "That shows that customers don't have anywhere to put their cash so they're looking to the secondary market."
Last week, the U.S. municipal bond funds received the largest net inflow since late December 2013, according to Wells Fargo, following net outflows the previous week.
Secondary market trading showed mostly strengthening, according to data provider Markit.
Yields on New York State Dormitory Authority sales tax revenue bonds with a 5% coupon maturing in 2043 fell one basis point in yield to 3.64%, while New Jersey Turnpike Authority revenue bonds with a 5% coupon maturing in 2038 slid two basis points in yield to 3.81%.
The yield on Illinois pension refunding GOS with a 5.1% coupon in 2033 dropped four basis points to 5.05%, while yields on Chicago Illinois International Airport revenue bonds with a 5.25% coupon maturing in 2034 slipped two basis points to 4.51%.
Municipal Market Advisors reported that two-year bond yields held steady at 0.19%, and that they declined by four basis points for the 10-year to 2.19%, and by three basis points to 3.43% for the 30-year bond.
