NEW YORK – The supply and demand imbalance in the tax-exempt market continues to weigh on investors.

With limited supply, demand appears high and munis rallied as yields fell up to 14 basis points this week. But some muni participants aren’t willing to play until yields look more attractive.

“The market turned around this week with the Federal Open Market Committee announcement to hold rates low to 2014,” said a Los Angeles trader. “Yields had been back tracking until then and then came back.” He added there is still limited supply which is holding back activity.

The trader added spreads have compressed this year. A double-A school district general obligation bond is trading at 35 basis points above the Municipal Market Data scale, down from 70 basis points in December, this trader said. “There is not a lot of supply and people are convinced rates are staying low so they want to buy. And as long as supply stays where it is, spreads will stay low.”

And so far this year, the yield curve has flattened while yield spreads have compressed, according to J.R. Rieger, vice president of fixed income indexes at Standard & Poor’s.

The difference in yields between the Standard & Poor’s AMT-Free Municipal Series 2013 index and the 2021 index moved to 213 basis points on Thursday from 225 basis points at the beginning of the year.

The spread between high yield and investment grade munis has tightened by 50 basis points since the beginning of the year. “The spread narrowing indicates the market is willing to take on more risk for higher yield,” Rieger said.

Some traders noted that after the rally this week, investors head into next week a little more wary about buying as yields remain at unattractive levels.

Coming into this week, “yields were up 20 basis points on the 10-year so people were anxious about the calendar which was the biggest so far this year,” said a trader in Atlanta. “But with the strength of Treasuries, deals were very successful and helped the market to stay firm and trade up.”

He added because deals were received well this week, nervous investors calmed down. “There is definitely money to use, but when there are really less attractive levels, people are more hesitant. Coming into this week, we had more basis points to play with but I am not as excited about the potential for next week.”

Except for losses on Monday, munis were firmer for the week, according to the MMD scale. The 10-year muni yield fell 10 basis points while the 30-year yield fell 14 basis points throughout the week.

On Friday, the 10-year yield fell two basis points to 1.77% while the 30-year yield dropped four basis points to 3.23%. The two-year muni yield closed steady at 0.35% for its 11th consecutive trading session.

Treasuries rallied Friday on less-than-positive GDP numbers. The benchmark 10-year yield fell four basis points to 1.90% while the 30-year yield fell three basis points to 3.07%. The two-year was steady at 0.22%.

In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming over the week.

Bonds from an interdealer trade of Barbers Hill, Texas, Independent School District 5s of 2035 yielded 3.28%, 18 basis points lower than where they traded Tuesday.

Bonds from another interdealer trade of Denver City and County School District 4s of 2027 yielded 2.76%, 11 basis points lower than where they traded Thursday.

Bonds from an interdealer trade of University of Puerto Rico 5s of 2024 yielded 4.00%, three basis points lower than where they traded Thursday.

A dealer bought from a customer New Jersey’s Tobacco Settlement Financing Corp. 5s of 2041 at 6.95%, three basis points lower than where they traded Wednesday.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.