Trading was quiet and steady on the final day of the week. Analysts said the calm was reassuring in light of volatile Treasury, equity, and commodity markets.
“I used the word 'resilient,’” said a trader in New York. “We didn’t move one way or the other no matter what the Treasury and equity markets did.”
He said yields fell one basis point across the curve, though yields were steady throughout according to Municipal Market Data’s triple-A scale. Either way, Friday marked the 19th day that muni prices were steady or firming.
The 10-year tax-exempt yield closed the week at 2.74%, its lowest since Nov. 12, 2010, and 53 basis points lower than a recent peak of 3.27% on April 11.
The two-year yield finished at 0.54%, its lowest since Nov. 15, and the 30-year yield ended at 4.45%, its lowest since Dec. 6.
Guy Lebas, fixed income strategist at Janney Capital Markets, called the ongoing rally “remarkable,” yet he argued the bulk of it “has been the result of falling Treasury yields rather than changing perceptions of the muni markets.”
Indeed, ratios have been relatively narrow considering the scope of the rally. Since muni prices began soaring on April 11, the 10-year muni-to-Treasury ratio has kept within a range of 86.4% to 92.8%, while the 30-year ratio has fluctuated between 103.4% and 107%.
But numerous traders continue to say sparse supply is the driver. If correct, it suggests munis will outperform if Treasuries find reason to switch direction.
“I think munis will hold their value better if and when Treasury yields revert higher,” said Anthony Valeri, fixed income strategist at LPL Financial, adding that there’s no question that buyers are returning to the tax-exempt market.
That theory was tested for a few hours Friday morning. Treasuries sold off at the start of the session when the April employment report posted a stronger-than-expected 244,000 gain in nonfarm payrolls. The benchmark 10-year yield jumped to 3.23%, up from Thursday 3.16%, before appetite returned and left the note back at 3.16% — a 22-week low.
All the while, munis were steady.
A trader in New York said the jobs report didn’t have a permanent impact in fixed income because of mixed details, namely that the unemployment rate rose to 9%.
“Certainly the unemployment report is not going to engender consumer confidence,” he said. “I think it will slow the rally down but I don’t think it will go into full-fledged reversal.”
Added Valeri: “Employment was certainly positive but there was a little nugget in there for the bears ... The bond market is not convinced that this is the all-clear for risk again.”
A trader in California said munis could ignore the volatile Treasury market because supply is in fact the dominant issue.
“They have to be stable or firm because there are so few bonds in the market,” she said.
The Bond Buyer calculated that $4.35 billion will enter the muni market this week. That’s up from the $4.04 billion last week but well below the $8 billion average in 2010.
Continued scarcity means the rally could keep on going.
