NEW YORK – The tax-exempt market appeared to take an additional holiday Tuesday as activity was quiet and market participants waited on the sidelines until new issues came to market later in the week.
“Munis are quiet,” an Atlanta trader said. “They seem firm a little and there is some activity going on but you have to figure that everyone is getting back from the holiday. So it’s quiet, but firm.”
Activity was unchanged from the morning. “The market is dead,” a second Atlanta trader said, adding it’s the first work day after a holiday weekend and traders are still trying to wake up.
Munis finished steady, according to the Municipal Market Data scale with the 10-year yield and the 30-year yield closing flat for the fifth consecutive trading session at 1.83% and 3.14%. The two-year yield also closed steady at 0.33% for the fifth consecutive trading session.
Treasuries ended mostly flat. The benchmark 10-year and 30-year yields finished steady at 1.74% and 2.84%. The two-year yield rose one basis point to 0.30%.
In the primary market Jefferies & Co. priced for retail $242 million of Massachusetts Water Pollution Abatement Trust state revolving fund bonds in two parts - $146 million new money and $96 million of refunding bonds. The credit is rated triple-A from all three major rating agencies.
Yields on the $146 million portion ranged from 0.35% with a 2% coupon in 2014 to 4.00% with a 4% coupon in 2042. Credits maturing in 2013 were offered via sealed bid. The bonds are callable at par in 2020.
Yields on the $96 million portion were not available by press time.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming over the past week.
A dealer sold to a customer New Jersey’s North Hudson Sewerage Authority 5.246s of 2032 at 5.03%, 14 basis points lower than where they traded a week prior.
Another dealer sold to a customer Lincoln, Neb., 5s of 2015 at 0.62%, 12 basis points lower than where they traded Thursday.
Bonds from an interdealer trade of New York City 5s of 2016 yielded 1.01%, nine basis points lower than where they traded Friday.
Bonds from an interdealer trade of Milwaukee County, Wis., 5s of 2013 yielded 0.34%, three basis points lower than where they traded a week before.
Elsewhere in the secondary market, trades compiled by data provider Markit showed both firming and weakening.
Yields on Central Minnesota Municipal Power Agency 5s of 2032 and Dormitory Authority of the State of New York 5s of 2034 each fell one basis point to 3.46% and 3.18%, respectively.
But yields on California 5s of 2042 and Dallas Independent School District 5s of 2023 each rose two basis points 4.10% and 2.18%, respectively.
Over the past month, muni exchange-traded funds have done well. The iShares S&P National AMT-Free Municipal Bond ETF – ticker MUB – rose 0.54% and the SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF – ticker SHM – rose 0.25%. The PowerShares Insured National Muni Bond ETF – ticker PZA – increased 0.64%.
The ProShares Ultra Seven to 10 Year Treasury ETF – ticker UST – gained 3.35%.
Munis ETFs beat the iShares iBoxx High Yield Corporate Bond ETF – ticker HYG – which dropped 2.10% and the iShares IBoxx Investment Grade Corporate Bond Fund ETF – ticker LQD – which dropped 0.33%.
Throughout the month of May, muni-to-Treasury ratios have risen as munis underperformed Treasuries and became comparatively cheaper. The five-year muni yield to Treasury yield ratio jumped to 100% from 97.6% at the beginning of the month. The 10-year ratio increased to 105.2% from 95.9% and the 30-year yield surged to 110.6% from 102.8% on May 1.
Ratios on the short end have also jumped from where they started the year. The five-year rose to 100% from 98.9% at the beginning of the year. The 10-year ratio increased to 105.2% from 96.4% on January 3.
Ratios on the long end still remain well below where they started the year. The 30-year muni to Treasury ratio fell to 110.6% from 119.4% on January 3.
With the recent increase in ratios and munis looking relatively cheap to their taxable counterparts, some market participant’s advocate taking advantage of the recent weakness.
“The backup in the municipal credit spreads and yield ratios over the last week raises the question of whether to continue our recent cautious stance, or if investors should take advantage of this weakness to increase exposure to tax-exempt municipals,” wrote analysts at Trident Municipal Research. “For anything other than a short-term trade, we still recommend patience and would use any swings to strength in near-term volatility to engage in a little spring cleaning.”
The analysts added that optimal points across the curve now are in the 2020 and 2025 spots and investors who need longer duration should stay inside 2035.