The red-hot rally in municipal bond prices sputtered on Tuesday, slowing down after a recent run that has taken some yields down to near record lows. Traders said yields of top-shelf munis were unchanged to a basis point higher on the day.
Meanwhile, traders were gearing up to tackle a hefty slate of new issues being squeezed into this holiday-shortened week.
The Lowdown on Munis
The decline in municipal bond yields to near all-time lows is being driven by investor demand, according to Dorian Jamison, municipal analyst at Wells Fargo Advisors.
"We've been watching falling muni yields as muni prices continue to rally," Jamison says.
"The yield on the 10-year triple-A benchmark yield (on the Municipal Market Data scale) is 29 basis points higher than its all-time low of 1.47% set on Nov. 28, 2012," he said, adding that the 30-year yield is only seven basis points higher than its all-time low of 2.47%, also set on Nov. 28, 2012.
"You can see there is not a lot of yield available on the long end of the curve," he said. "That's why we find more value in the short and short-to-intermediate sectors."
On Tuesday, the yield on the 10-year benchmark general obligation was one basis point higher at 1.76% from 1.75% on Friday, while the yield on 30-year GOs was unchanged at 2.54%, according to a final read of MMD's triple-A benchmark scale. On Jan. 2, the yield on the 10-year stood at 2.01% while the yield on the 30-year stood at 2.83%.
Additionally, WFA said the spread between the 10-year and 30-year yields since the start of the year has fallen 22 basis points to 1.78%, a 12-month low.
Jamison cited the 2014 data on municipal bond funds, where investors poured money into the funds in 44 out of the 52 weeks of the year, as pointing to continuing muni demand.
"There has been a strong streak of demand as seen in the muni bond fund flow data," he said. The need to reinvest January principal and coupon payment cash is making demand for munis very strong, which in turn is fueling the price rally and pushing yields lower, he said.
However, Jamison cautioned there has been a downside to the falling yields.
"Investor desire to reach for higher yield has led them to look lower down the credit quality ladder," he said. "This is not without risk in a still challenging credit environment."
The current spread relationship between triple-A and triple-B bonds is near a six-year low and can mean that the lower quality bonds are "currently fully valued relative to high-quality municipal bonds, which suggests that investors may not be compensated for the added credit risk that triple-B bonds can represent," Jamison said.
Secondary Market
Treasury prices were mixed on Tuesday, with the two-year note yield rising to 0.49% from 0.47% on Friday. The 10-year yield was down to 1.80% from 1.81%, while the 30-year yield fell to 2.40% from 2.43%.
On Tuesday, the 10-year muni to Treasury ratio stood at 97.7% compared to 96.7% on Friday, while the 30-year muni to Treasury ratio was at 106.1% versus 104.5%.
MSRB Reports Previous Session's Activity
The Municipal Securities Rulemaking Board reported 31,732 trades on Friday on volume of $8.098 billion. Most active on Friday, based on the number of trades, was the New York Metropolitan Transportation Authority 2015 Subseries A1 revenue bond 5s due 11/15/2045, which traded 175 times with an average price of 117.135 and an average yield of 3.05%.
Primary Market
Muni volume this week is estimated at $7.824 billion, according to Ipreo and The Bond Buyer. Negotiated deals total $5.910 billion while bonds while competitive sales total $1.915 billion.
Some of the big deals slated for the week include the $508 million Alabama Federal Aid Highway Finance Authority's special obligation revenue bonds to be priced by Morgan Stanley on Wednesday and $460 million in competitive offerings from Washington state of various purpose general obligation refunding bonds, going up for bid on Wednesday.
The largest deal of the week will come on Thursday -- a $1.75 billion offering from the Texas Transportation Commission for the Central Texas Turnpike System, consisting of first- and second-tier revenue refunding bonds to be priced by Barclays Capital. Also slated for Thursday are the $460 million Louisiana gas and fuels revenue bonds to be priced by Citigroup Global Markets and the $442 million East Bay Municipal Utility District, Calif., water revenue bonds to be priced by J.P. Morgan Securities.
