NEW YORK – To say the tax-exempt market finished the week on a high-note is an understatement. Munis had a fantastic week, with prices showing double-digit gains and yields setting new record lows as each day passed.
“Customers are buying everything in sight,” said a trader in New York. “It’s an extremely busy Friday.” And that seemed to be the theme of every trading session this week.
Throughout the week, the two-year has fallen seven basis points, the 10-year yield has fallen 14 basis points, and the 30-year yield has dropped an astonishing 30 basis points, according to the Municipal Market Data scale.
On Friday alone, munis did not let up as they had a significant rally after already starting the week off on a strong note. Inside the five-year, munis were flat to three basis points firmer. The six-year yield dropped two basis points and the seven-year dropped three basis points. Yields on the eight-year and nine-year fell four basis points, yields on the 10-year dropped five basis points, yields on the 11-year to 13-year plunged six basis points, and yields on the 14-year to 20-year plummeted seven basis points. Outside the 21-year maturity, yields took an eight to nine basis points nose dive.
On Friday, the two-year closed steady at 0.35%. The 10-year yield closed down five basis points to 1.71%, beating the previous record of 1.76% as recorded by MMD Thursday. The 30-year dropped nine basis points to 3.20%, beating the previous record of 3.20% as registered on Thursday.
But with muni yields hitting new record lows almost daily this week, there was some skepticism in the market about how long the rally can last.
“There is disbelief in the continued MMD bumps, but here they come again,” said a trader in Los Angeles. “We are waiting for the calendar to ramp up and see how real this is and if the market will hold. If supply jumps, we’ll see if it can hold.”
He added overall for the week, there was a “strong tone for people who want to sell. Prices keep going up. It’s all the same types of things we’ve been seeing. There is not enough supply in the market and there are more people who want to buy than there are sellers.”
In the primary market this week, deals were priced extremely well, with some traders noting prices were bumped 10 basis points in some cases.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed even more eye-popping numbers.
Bonds from an interdealer trade of Oklahoma Transportation Authority 5s 2026 yielded 2.55%, 49 basis points lower than where they traded last Friday.
Bonds from an interdealer trade of New York Liberty Development Corp 5s of 2041 yielded 3.75%, 34 basis points lower than where they traded last Friday.
Bonds from another interdealer trade of California 4.75s of 2027 yielded 3.26%, 23 basis points lower than where they traded the previous Friday.
A dealer sold to a customer Washington 5s of 2041 at 3.47%, 39 basis points lower than where they traded last Friday.
Municipal bond mutual funds saw inflows not seen in almost two years. In the week ending Jan. 11, municipal bond funds saw $1.11 billion of inflows from funds that report their flows weekly, according to Lipper FMI. That’s more than double the amount seen in the week ending Jan. 4, when there were net inflows of $523 million.
It’s the sixth straight week of positive flows, and the 17th week out of the past 19. The number is the highest seen since March 2010, when inflows reached $1.13 billion.
High-yield muni funds had a large boost in inflows, and have been in the black for five of the past six weeks. Funds that report weekly saw inflows of $270 million, Lipper said. The previous week, high-yield funds reported outflows of $17.5 million.
“These inflows come as no surprise,” said MMD’s Daniel Berger. “There is little doubt that January re-investment needs should outstrip issuance during the past few weeks with new issue volume not expected to resume in earnest until February. With more retail fund buyers, there could be more demand in the longer end of the muni market and during this heavy reinvestment period the muni curve is likely to see more flattening in the foreseeable future.”
Looking to new issuance next week, the tax-exempt market can expect $3.45 billion, down from this week’s $4.19 billion. In the negotiated market, about $2.42 billion is expected to be issued, up from this week’s revised $2.03 billion. On the competitive calendar, $1.03 billion is expected to come to market, down from this week’s revised $2.16 billion.
