Municipal bond prices ended flat on Thursday, traders said, with yields on some maturities unchanged. Treasury bond prices finished mixed after the release of weak retail sales and weekly jobless claims data as gains were capped by rising equities.
Elsewhere, another sector of the muni market has been garnering interest from investors and analysts - taxable municipal bonds.
Muni Taxables Hold Value vs. Corporates
Many market investors searching for value in the tax-free sector are now looking in an unlikely place - taxable municipal bonds. And they are finding it there when they compare the relative value of taxable munis to corporate bonds, according to a research report.
"Most taxable municipal sectors offer higher yields and spreads versus similar structure corporates -- as well as lower historical default rates for rated portions of the municipal market," according to JPMorgan Securities' latest Fixed-Income Markets Weekly.
"Over the past year, fixed-income yields have fallen significantly with 10-year U.S. Treasury yields lower by 89 basis points," the report says. "This has tested investor ability to achieve adequate return while maintaining credit and structural discipline. Taxable municipal bonds offer higher yields than typically available on similar term and quality U.S. corporate backed debt."
Municipal traders agree the sector is looking pretty good right now.
"It's a 'Tale of Two Cities' when it comes to munis," a New York trader said. "Taxables are most attractive right now, as they were extremely cheap last week."
JPMorgan said that while the supply of new taxable munis is down sharply from when Build America Bonds were issued in 2009-2010, the average taxable municipal issuance is $27.7 billion over the last four years compared with average taxable muni issuance of $13.6 billion in 2005-2008. Including BABs, outstanding taxable munis total about $374 billion.
"Analyzing the maturity breakdown of the bonds outstanding, we find that over 50% ($196 billion) of the bonds outstanding are scheduled to mature in 15-years or longer," the report says "Categorizing taxable municipal bonds by coupon, we find that 48% ($180 billion) of the amount outstanding are in bonds with coupons between 5.25%-7%. The 5.25%-6% coupon bonds are the most prevalent structure, accounting for 25% of the total amount outstanding."
The report adds that trading in taxable muni is concentrated in bonds with 5% and higher coupons and 15-year and longer maturities.
In addition to higher yield, JPMorgan said historical default studies show that in the credit-rated section of the municipal bond market there is a greater cash flow certainty than in the corporate bond sector.
"Investors seeking additional yield while maintaining or increasing credit quality, should consider overweighting taxable municipal bonds," JPMorgan said. "As a result of the recent rate rally, taxable municipal spreads versus alternative fixed-income products has widened dramatically in 2015. Double-A rated long-dated non-callable taxable municipal bonds currently yield 4.10%. This is 49 basis points in excess of yields available in similar rated corporates and over 168 basis points higher than the yield on Treasury securities."
While investors are starting to take notice and spreads beginning to tighten, taxable munis still hold good value for buyers, professionals say.
"While taxables have tightened up this week, they are still cheap relative to corporates and tax-exempts," the New York trader said.
Primary Market
The primary market was quiet on Thursday, after seeing several large deals price on Wednesday.
JPMorgan on Thursday received the written award on two issues of bonds for Tacoma, Wash. - the city's $109.3 million of sewer revenue and refunding bonds and $21.095 million of solid waste revenue green bonds.
The green bonds were priced to yield from 0.81% with a 5% coupon in 2017 to 2.64% with a 5% coupon in 2025. The bonds are rated A1 by Moody's Investors Service, AA by Standard & Poor's and AA-minus by Fitch Ratings.
The sewer revenue and refunding bonds were priced to yield from 0.46% with a 3% coupon in 2016 to 3.50% with a 4% coupon in 2036; a 2040 term bond was priced as 4s to yield 3.58% and a 2045 term was priced as 4s to yield 3.64%. The bonds are rated Aa2 by Moody's and AA-plus by S&P and Fitch.
Secondary Market
Prices of top-rated munis finished flat on Thursday. The yield on the 10-year benchmark muni general obligation was unchanged from 2.04% on Tuesday, while the yield on 30-year GOs was flat at 2.86%, according to the final read of Municipal Market Data's triple-A scale.
Since the start of the month, the yield on the muni 10-year benchmark general obligation has risen 30 basis points, while yield on the 30-year GO is 36 basis points higher, according to MMD.
Treasury prices were mixed after the release of weak economic data. Retail sales fell 0.8% in January, less than economists' predictions of a 0.5% drop. Initial claims for state unemployment benefits increased to 304,000; analysts had expected claims to rise to 285,000. Stocks were about 100 points higher in late trading.
In late trade, the two-year Treasury note's yield fell to 0.63% from 0.66% on Wednesday, while the 10-year yield rose to 1.99% from 1.99%, and the 30-year yield remained unchanged at 2.57%.
The 10-year muni to Treasury ratio was calculated at 103.0% on Thursday versus 102.6% on Wednesday, while the 30-year muni to Treasury ratio stood at 111.6% compared to 111.7%.
Bond Buyer Visible Supply
The Bond Buyer's 30-day visible supply calendar fell $1.890 billion to $7.827 billion on Thursday. The total is comprised of $1.767 billion competitive sales and $6.060 billion of negotiated deals.
MSRB Reports Previous Session's Activity
The Municipal Securities Rulemaking Board reported 40,531 trades on Wednesday on volume of $9.600 billion. Most active on Wednesday, based on the number of trades, was the State of New York Mortgage Agency 2015 Series 190 homeowner mortgage revenue bonds 3.45s of 2030, which traded 342 times with an average price of 99.813, an average yield of 3.463%.
Tax-Exempt Money Market Funds Saw $766M Inflow
Tax-exempt money market funds saw assets rise by $766.0 million to $260.409 billion in the week ended Feb. 10, according to The Money Fund Report, a service of iMoneyNet.com. In the previous week, funds saw outflows of $1.215 billion as assets fell to $259.643 billion.
The average, seven-day yield for the 396 weekly reporting tax-exempt money funds held steady at 0.01% for the 93rd week in a row.
The total net assets of the 992 weekly reporting taxable money funds rose $6.964 billion to $2.454 trillion in the week ended Feb. 10, after seeing a decline of $10.159 billion to $2.447 trillion in the prior week.
The average seven-day yield for the taxable funds was unchanged at 0.02% for the fourth straight week -- after spending 87 weeks at 0.01%.
Overall the combined total net assets of the 1,388 weekly reporting money funds increased by $7.730 billion to $2.714 trillion after experiencing a loss of $11.374 billion to $2.707 trillion in the previous week.
