Prices of top-rated municipal bonds ended mixed on Monday, traders said, as another snowstorm limited trading activity even as the strongest municipal-to-Treasury ratios in a year signaled the value of the tax free securities.
Traders were waiting for this week's almost $9 billion of new deals to come to market, starting with Tuesday's $1 billion sale of Pennsylvania general obligation bonds.
Secondary Market
The yield on the muni 10-year benchmark general obligation on Monday ended two basis points higher at 1.74% from 1.72% on Friday, while the yield on 30-year GOs was unchanged at 2.50%, according to the final read of Municipal Market Data's triple-A scale.
On Monday, Treasury prices were higher. The two-year note yield decreased to 0.46% from 0.48% on Friday; the 10-year yield dropped to 1.67% from 1.68%, while the 30-year yield declined to 2.24% from 2.26%.
Meanwhile, the muni-to-Treasury ratio has been making tax-exempts look attractive.
The ratio is calculated by taking the yield on a triple-A rated muni and comparing it to the yield on a Treasury of a similar maturity. The higher the ratio, the more attractive tax-exempt bonds are to Treasury bonds.
When used in combination with other measurements, the ratio can be a useful tool for investors and fund managers in gauging the relative value of munis to other investments.
"Muni to Treasury ratios closed Friday at their 12-month highs. This is unusual because January is typically a very strong month of relatively low issuance and high reinvestment demand," says Daniel Berger, Municipal Market Data's senior market strategist. "The issue here is while munis have performed well, the performance of Treasuries has been outstanding."
Many market analysts agreed.
"Since the year began, 10-year U.S. Treasury yields declined by approximately 30 basis points, while same maturity municipal yields dipped by just 20 basis points," according to the latest research report from Morgan Stanley Wealth Management. "This dynamic propelled municipal-to-Treasury ratios higher That said, for investors in the higher federal tax brackets, the relative value now present in municipals appears quite compelling."
Berger says the dynamics in play may keep municipals looking good.
"Treasuries are viewed as a 'safe haven' for the world -- and with a Quantitative Easing planned for Europe, U.S. interest rates are very enticing," Berger says. "For example, 10-year Treasuries are currently offered at about 1.67% (their lowest level since May 2013) which compares favorably to 0.317% for the 10-year German Bond yield and 1.38% for the 10-year U.K. Gilt yield. Therefore, the muni to Treasury ratios may remain attractive for the foreseeable future."
On Monday, the 10-year muni to Treasury ratio increased to 104.2% from 103.0% on Friday, while the 30-year muni to Treasury ratio slipped to 111.1% from 111.6% on Friday. On Jan. 2, the 10-year muni to Treasury ratio stood at 94.8% and the 30-year muni to Treasury ratio was at 105.2%.
Meanwhile, as world economic uncertainty continues to drive volatility in the equity markets, there is some concern about fixed-income markets, where rates have moved lower, according to Van Eck Global's senior municipal strategist James Colby.
Taxable equivalent returns for both investment-grade and high-yield municipals have continued to demonstrate the effect of the tax-exempt coupon and its impact upon returns, Colby wrote in a recent research report. Municipals have mirrored Treasuries and have generally posted positive returns year-to-date. But they have been outperformed by a surging stock market.
"Municipal returns over the last three year period are lower versus the broad U.S. equity market, even on a taxable-equivalent basis," Colby says. "However, the risk, as measured by standard deviation, was measurably less for municipals as compared to the S&P 500 Index."
The report also notes that although high-yield muni bonds nominally yield less than corporate high-yield bonds, these yields are still some 13 basis points above the long-term comparative average of the two which was 97% at yearend.
"The relationship continues to favor high-yield municipals over corporate high-yield," he says.
While uncertainty lingers about the health of the U.S. economy and the pace of its recovery, where interest rates are headed, the struggling Eurozone and Chinese economies, and falling oil prices, Colby remains confident about muni bonds.
"In my view, municipals still embody a compelling and resilient asset class and have exhibited relatively low volatility during these uncertain times," Colby says.
MSRB Reports Previous Session's Activity
The Municipal Securities Rulemaking Board reported 36,457 trades on Friday on volume of $11.245 billion. Most active on Friday, based on the number of trades, was the Tulare Local Health Care District, Calif., taxable Build America Bonds of 2009 7.95s of 2035, which traded 117 times with an average price of 108.226 and an average yield of 5.841%.
Primary Market
Volume for this week is estimated at $8.834 billion, according to Ipreo and The Bond Buyer, This is up from a revised total of $4.108 billion last week, according to Thomson Reuters. About $6.079 billion negotiated deals are scheduled while competitive sales are expected to total around $2.756 billion.
On Monday, J.P. Morgan Securities priced the Katy Independent School District, Texas' $201.625 million of school building and refunding bonds. The $152.535 million Series 2015A unlimited tax school building bonds were priced to yield from 0.155% with a 2% coupon in 2016 to 3.02% with a 4% coupon in 2035; a 2040 term bond was priced as 5s to yield 2.70% and a 2045 term was priced as 5s to yield 2.75%. The $49.09 million unlimited tax refunding bonds, Series 2015B, were priced to yield from 1.31% with a 4% coupon in 2021 to 3.07% with a 4% coupon in 2037.
Both series are backed by the Texas Permanent School Funding Guarantee Program and are rated triple-A by Moody's Investors Service and Standard & Poor's; the bonds carry underlying ratings of Aa1 from Moody's and AA from S&P.
In the competitive arena, Pennsylvania's $1 billion unlimited tax general obligation bonds headline the new issue slate and will go up for bidding on Tuesday. The bonds are rated Aa3 by Moody's and AA-minus by both S&P and Fitch Ratings.
