NEW YORK – Yields in the municipal market declined again on Friday as buyers sense a bottom in the market. That, coupled with a rebound among Treasuries, helped muni yields fall an average of four basis points to end the week.
This is the second consecutive day the muni market has strengthened, following a sell-off that lasted roughly eight weeks.
“We got way oversold,” said a trader in Chicago. “Things were just getting so cheap, it didn’t make any sense.”
The trader said that when prices began reversing Thursday afternoon and Friday morning, the market turned on a dime.
“Guys were trying to get of things at any price, so when it turned around a little bit today, people realized there wasn’t much left to buy at market prices,” he said. “When it looked like things were getting better, guys marked prices up immediately.”
A trader in New Jersey said cheap yields on the long-end got retail buyers interested again, and that started pushing up prices.
“So you find a bottom and then it starts pushing up a little bit,” he said. “That’s what’s happening now.”
The Municipal Market Data triple-A 10-year scale declined seven basis points Friday to 3.18%, the 20-year scale decreased nine basis points to 4.40%, and the scale for 30-year debt fell 12 basis points to 4.66%.
Secondary market activity was described as moderate to active, but much more active when compared to the traditional holiday period.
“I’m cautiously optimistic that maybe we’ve seen the worst part of December,” said R.J. Gallo, a portfolio manager at Federated Investors in Pittsburgh.
“Easing up supply should have a favorable price response, and it’s been doing a lot to shore up price performance the last couple of days,” he added.
Gallo said the municipal market has clearly attracted some crossover buyers who noticed the fat yields available on state and local government debt and decided to take advantage.
Treasuries continued to rally, particularly in the intermediate and long-end of the curve. The benchmark 10-year yield finished the week at 3.34%, or 12 basis points lower than Thursday’s close. The 30-year bond yield closed at 4.45%, or 13 basis points lower than Thursday’s close. The two-year note moved four basis points lower to 0.62%.
“That certainly had an impact on munis,” said a trader in New York. “They’ve had an impact the last three days.”
The recent strengthening is slight compared to the massive sell-off in the preceding weeks. The triple-A 10-year muni scale is still up 88 basis points compared to Oct. 12 when it was 2.30%. The 30-year scale has leapt 100 basis points over the same period.
Tax-exempts remain cheap relative to Treasuries. Friday’s triple-A muni scale in 10 years was at 95.78% of comparable Treasuries and 30-year munis were at 105.67%, according to MMD.
The new-issue market was quiet Friday, with no significant new deals to speak of.
In economic data released Friday, the Conference Board’s index of leading economic indicators, a composite measure that tracks turning points in the economy, rose 1.1% in November, marking the biggest gain in five consecutive increases.
“The indicator was given a nice push by vendor delivery delays, declining jobless claims, a wider interest rate spread, confidence, and, well, everything but housing,” said Jennifer Lee, economist at BMO Capital Markets.
