The tax-exempt market followed Treasuries lower Tuesday after consumer confidence rose to a five year high.
Tax-exempts followed the lead of Treasuries even though issuance is scheduled to be lighter than usual this week, and the market stands to benefit from June 1 reinvestment of about $34 billion in redemptions and coupon payments.
“The market definitely feels weaker,” a Chicago trader said. “It’s hard to tell exactly where we are going because there is a ton of roll-off on June 1, which you would think would keep things tighter than Treasuries. But munis are selling off.”
This trader added that with a weaker Treasury auction Tuesday morning, munis appeared to soften with their taxable counterparts. “The short end is holding tight inside five years. But the long end is weaker. Interest really falls outside 10 years.”
Other traders said munis struggled to gain any traction coming off a three-day holiday weekend.
“Munis are still sleeping,” a New York trader said. “They are tired from the weekend. Any excuse to not do anything, the bond market will take it.”
With muni-to-Treasury ratios rich across the curve, market participants looked to specific sectors to find value, and some said taxable bonds were outperforming.
The Standard & Poor’s Long Intermediate Taxable Municipal Bond Index returned 1.2% year-to-date versus the Standard & Poor’s U.S. Issued Investment Grade Corporate Bond Index which returned 0.38% year-to-date.
Taxable munis have underperformed in May, according to J.R. Rieger, vice president of fixed income indexes, but have a higher yield-to-worst. Month to date, the taxable index returned negative 1.6% while the corporate index returned negative 1.23%. Bonds in the taxable index have an average duration of 6.8 years and are yielding 66 basis points more than the corporate index with an average duration of 6.6 years.
Bonds in the Standard & Poor’s BAB Index are yielding even more, but have a longer duration. The BAB index returned 1.59% year-to-date, but is down 2.34% for the month. The average duration of bonds in the index is over 10 years.
BABs are outperforming year-to-date in part because of the longer duration and higher coupon. Bonds in the BAB index yield 140 basis points more than bonds in the corporate index.
In the primary market this week, new deals are expected to start pricing Wednesday with $4.03 billion, down from last week’s revised $7.19 billion. The negotiated market can expected $3.22 billion, down from last week’s revised $5.77 billion. On the competitive calendar, $807.3 million should be auctioned, down from last week’s revised $1.42 billion.
With favorable supply and demand dynamics this week, as well as large June and July reinvestment money expected, some market participants were surprised by the muni selloff.
“Munis prices are generally sticky, especially when Treasuries sell off, and even moreso when we have somewhat light supply expected this week and June 1 reinvestment approaching,” a trader in Ohio said.
In the secondary market Tuesday, trades compiled by data provider Markit showed mostly weakening.
Yields on El Paso, Texas, Independent School District 5s of 2021 jumped six basis points to 1.89% and Ohio’s Buckeye Tobacco Settlement Financing Authority 5.75s of 2034 rose four basis points to 6.53%.
Yields on Tennessee 5s of 2027 and Missouri State Health and Educational Facilities Authority 4s of 2042 rose five basis points each to 2.35% and 4.12%, respectively.
Yields on New York 4s of 2030 and San Antonio, Texas, water revenue 5s of 2031 rose three basis points each to 2.90% and 3.11%, respectively.
Yields on the Municipal Market Data scale ended as much as nine basis points higher. The 10-year yield jumped nine basis points to 1.99% and the 30-year yield increased seven basis points to 3.15%. The two-year finished flat at 0.29% for the third session.
Yields on the Municipal Market Advisors 5% scale ended as much as eight basis points higher. The 10-year yield jumped eight basis points to 2.05% and the 30-year yield climbed seven basis points to 3.26%. The two-year was unchanged at 0.35% for the third session.
Treasuries continued to weaken as the day progressed. The benchmark 10-year and 30-year yields jumped 14 basis points each to 2.15% and 3.31%, respectively. The two-year yield increased four basis points to 0.30%.
Treasuries were weaker after the Conference Board’s consumer confidence index came in better than expected, rising to 76.2 in May after an upwardly revised April reading of 69.0. Economists had expected a reading of 71.0. The index was its highest since 76.4 in February 2008.
“Consumer confidence surged in May on broad-based gains in both the assessment of current conditions and expectations,” wrote economists at RDQ Economics. “The current situation index was the highest since May 2008 as the net reading on the labor market situation tied December 2012 as the highest reading since September 2008.”
They added, “With the four-week average of jobless claims corroborating this improvement in the labor market, it appears that we are shaping up for a solid employment reading for May. Since the pace of the Fed’s asset purchases has been tied to the labor market, this report could have some influence on expectations of the timing of tapering, which we still see as likely occurring in September. As for the overall economy, it seems that rising home and equity prices, an improving labor market, and easing gasoline prices are all acting to provide a significant offset to any fiscal drag on the consumer.”
