New York – The tax-exempt market was steady and quiet Monday with yields unchanged from Friday’s levels and traders noting that a whole lot of nothing was happening in munis.
“I’m not seeing a lot today,” a New York trader said. “It’s very quiet so far today. It’s like a Friday in the summertime, unfortunately.”
He added that he’s hoping new deals later this week will force activity to pick up, but if that last weeks have shown anything, it’s that traders aren’t participating right now. “I’m hoping for new deals this week but it has been a little quiet and last week was a little quiet. I’m hoping this will turn around soon.”
Another trader in New York said activity has been very light as well, but new deals should help spur activity. “Overall activity in the market felt relatively light last week and many market participants appear to be looking forward to some significant new issue pricings this week,” he said, referring to the highly rated $385 million Tennessee pricing and the $830 million Dormitory Authority of the State of New York deal.
“Though we got bumps Friday and the technical factors remain favorable – mutual fund inflows and moderate supply – I am going into this week cautiously.”
Munis ended Monday steady across the curve, according to the Municipal Market Data scale, holding at Friday’s firmer levels.
The 10-year muni yield finished steady at 1.83% while the 30-year yield closed at 3.26%. For the fifth consecutive trading session, the two-year held steady at 0.29%, the record low set last Tuesday.
Treasuries weakened Monday on news that Greece approved its latest austerity plan that will allow the country to qualify for financial assistance to avoid a default. The two-year and the benchmark 10-year yield jumped two basis points each to 0.30% and 1.98%. The 30-year yield rose one basis point to 3.12%.
In the competitive market, JPMorgan won the bid for $74 million of King County, Wash., limited tax general obligation short-term notes. The notes were priced to yield 0.14% and have a 2.5% coupon. The credit is rated M1G-1 by Moody’s Investors Service, SP-1-plus by Standard & Poor’s, and F1-plus by Fitch Ratings.
For new deals this week, “we expect the somewhat larger but well-diversified slate of offerings will be well-subscribed for given that investors have a considerable amount of capital to put into the market from coupon and redemption payments and sizable inflows,” said Peter DeGroot, a municipal analyst at JPMorgan.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming.
A dealer sold to a customer New York City Municipal Water Finance Authority 5s of 2045 at 3.84%, five basis points lower than where they traded last Thursday.
Bonds from an interdealer trade of Oregon 5.762s of 2023 yielded 3.26%, two basis points lower than where they traded Friday.
Bonds from another interdealer trade of San Marcos, Calif., Public Facilities Authority 5s of 2038 yielded 3.67%, one basis point lower than where they traded Thursday.
A dealer sold to a customer New York Liberty Development Corp. 5s of 2041 at 3.90%, one basis point lower than where they traded Friday.
In the past week, muni-to-Treasury ratios have increased as munis underperformed Treasuries and became cheaper. On Friday, the 10-year ratio closed at 93.4%, up from 90.8% the previous week. The 30-year closed up to 104.8% from 102.2%. The five-year ratio fell significantly, closing down to 82.5% from 87.2% the previous week.
Compared to the 12-month average, MMD’s Daniel Berger said ratios have become rich. “Now is not the best time to be committing new money to the municipal bond market,” he said. “Heavy seasonal demand combined with a light municipal bond calendar has led to a ‘rich’ market where virtually every maturity is overvalued relative to recent historical averages to Treasuries.”
Berger added better entry points into the market may come along toward the end of the first quarter. “It is only after additional supply enters the market combined with a lower reinvestment demand that better values will be apparent.”
Others agree. “The one-year through five-year area is very rich while the six- to nine-year range represents an opportunity,” according to Chris Mier, municipal strategist at Loop Capital Markets. “Five year bonds should be sold to buy the six-year to pick up the 30 basis points that exists between the two. This yield pickup is greater than the gap before and after.”
He added that looking longer out the 22-year is the cheapest maturity available.
Analysts at Citi also recommend investing further out on the curve. “We continue to believe that the magnitude of any rebound in muni yields relative to Treasuries will be quite modest, with investors holding huge amounts of cash and near cash with painfully low yields, and the muni yield curve still quite steep beyond 10 years,” wrote George Friedlander.
“Investors should move out along the yield curve, although we are not averse to waiting a bit to see whether supply rebounds, pushing yields a bit higher.”
He added that by this time of the year, he had expected the “January effect” to wind down, but there are no signs of yields rising substantially. The factors that drove yields to historic lows - such as sharp decline in new issue supply, dealers rebuilding positions early in the year, and the Jan. 1 heavy bond call date - have already hit the market. But still, yields continue to stay at low levels.
“While the muni market felt substantially weaker last week, from seven years on out to the long end, the impact on high-grade yields has been only modestly worse than the decline in the Treasury market,” he said, adding the belly of the curve is the one exception where there has been a sell-off in munis compared to Treasuries.
In one week, the 10-year Treasury yield climbed 18 basis points, while the muni yield followed by climbing 18 basis points too. However, the 30-year Treasury yield climbed 19 basis points while the 30-year muni yield only rose 15 basis points.
“Indeed, it is only in the belly of the yield curve where muni yields as a percentage of Treasury yields are up significantly from three-month lows,” Friedlander said, adding the 10-year ratio is up nearly four percentage points from the three-month low, while the 30-year ratio is up only 0.9 percentage points from recent lows.