The tax-exempt market ended what was a busy week in the primary and secondary market on a very quiet note Friday afternoon.
Traders said the market ended about steady after weakening in the morning.
“I’ll sum it up in two words,” a Boston trader said: “very slow.”
A trader Friday morning said munis took a breather after an active, firm week. “Munis are off,” a New York trader said. “There seems to be better sellers. They have been rallying pretty good so munis are taking a break.”
In the secondary market, trades compiled by data provider Markit showed stronger trades. Yields on California 4s of 2037 and New Jersey Institute of Technology 5s of 2042 dropped three basis points each to 3.45% and 3.15%, respectively.
Yields on New York City Municipal Water Finance Authority 5s of 2047 and Texas 5s of 2036 fell two basis points each to 3.22% and 2.70%, respectively.
Yields on New Jersey Tobacco Settlement Financing Corp. 5s of 2041 fell one basis point to 5.71%.
On Friday, the Municipal Market Data scale ended steady to slightly higher. The 30-year yield fell three basis points to 2.77%. The two-year closed steady at 0.34% for the third trading session while the 10-year closed flat at 1.70% for the second session.
Treasuries ended stronger Friday. The benchmark 10-year yield and the 30-year yield fell three basis points each to 1.87% and 3.05%, respectively. The two-year was steady at 0.26%.
Despite uncertainty over a cap on municipal tax exemption, munis have had strong performance. The S&P National AMT-Free Municipal Bond Index returned 0.53% so far in January, according to JR Rieger, vice president of fixed income at Standard & Poor’s Dow Jones Indices.
With a tax-equivalent yield of 3.04%, munis remain attractive compared to a corporate bond yielding 2.54% as tracked by the Dow Jones Corporate Bond Index.
And relative to Treasuries, munis continue to look attractive. Actual non-callable bonds with an average rating of double-A returned 0.84% so far in January as tracked by the S&P AMT-Free Municipal Series 2022 Index. With the average bond in the index yielding 2.14%, munis look attractive to 10-year Treasuries with a yield ratio of 113%.
“Bottom line, the yields of actual municipal bonds show that municipal bonds provide incremental yield when compared to other asset classes,” Rieger noted.
While high yield munis have generally performed well, the tobacco sector has struggled so far in 2013, returning negative 0.01% as measured by the S&P Municipal Bond Tobacco Index.
“This long duration, high-risk sector was a leading performer in 2012 with a 25% return and helped drive high-yield municipal bond returns,” Rieger said, cautioning that “over exposure to this sector could bring unwanted volatility to portfolio returns.”