NEW YORK – The tax-exempt market was stronger Monday, following Treasuries, snapping an eight day streak of consecutive losses. Traders focused on the reduced supply in the primary expected this week after munis tumbled under last week’s largest new issuance calendar of the year.
“Munis are stronger,” a Chicago trader said. “The calendar has subsided and there are some big names in the market like Illinois and higher-yielding names. It’s much more constructive.”
He added the stronger tone Monday morning “is not a rally, but is slightly more positive which makes sense.” Until the Greece situation is resolved, the general tone of the market will not change, he said.
“We are cheap now. We are 104% of Treasuries in the 10-year so there is a case to be made,” he said.
Many analysts noted the 10-year spot on the curve was one of the strongest performers Monday because of the large sell-off last week. One municipal analyst tweeted the 10-year could continue to strengthen “as long as the 10-year triple-A to Treasury [ratio] is at 100%-plus, Treasuries post gains, and the calendar is light.”
Another trader said Monday was quiet ahead of issuance this week as traders wait to see how the market handles supply after a rough week of increased issuance last week.
“It’s very quiet today,” a Los Angeles trader said.
Munis were stronger, according to the Municipal Market Data scale. Yields inside six years were steady, while the seven- to 11-year yields fell two and three basis points. Yields outside 12 years fell one and two basis points across the curve.
On Monday, the two-year yield closed steady at 0.27% for its third consecutive trading session, remaining one basis point above its record low. The 10-year yield dropped three basis points to 2.02% while the 30-year yield fell two basis points to 3.29%.
Treasuries started Monday stronger and ended the day mostly flat. The two-year and benchmark 10-year yields ended steady at 0.33% and 2.04%. The 30-year yield fell two basis points to 3.17%.
In the primary this week, the tax-exempt market can expect $5.81 billion in new issuance, down from last week’s revised $9.36 billion. In negotiated deals, $4.73 billion is expected, down from last week’s revised $7.36 billion. On the competitive calendar, $1.18 billion is expected to come to market, down by almost half from last week’s revised $2 billion.
Bank of America Merrill Lynch priced for retail $120 million of Lee County, Fla., School Board bonds, rated Aa3 by Moody’s and AA-minus by Standard & Poor’s. Institutional pricing is expected Tuesday. Pricing details were not yet available.
Over the past week, muni-to-Treasury ratios rose as munis underperformed Treasuries and became comparatively cheaper. The five-year ratio jumped to 87.8% on Friday from 83.3% the week prior. The 10-year ratio moved to 100.5% from 96.5% the week before.
The surge of supply last week was the main factor in moving ratios higher. “Even though it may have been somewhat more difficult to place all of a transaction, some deals were upsized once again,” wrote John Hallacy, municipal research strategist at Bank of America Merrill Lynch, referring to last week when the year-to-date’s largest weekly supply hit the market. “The greatest change since last week has been the back up in the 10-year ratio. It is clear that the ‘belly of the curve’ has been most affected by [last] week’s change.”
Others noted the sell-off in the 10-year spot has made that point on the curve more attractive. “Yields in the ‘belly’ of the muni yield curve have rebounded significantly relative to longer and shorter maturity counterparts since mid-January, and muni yields in that range have also cheapened significantly relative to Treasury yields,” wrote George Friedlander, muni analyst at Citi. “While intermediates are now not as overvalued as they had been, we do not believe that they should be viewed as cheap as yet.”
And while the new-issue calendar has been the focus for traders the past few weeks, most of the heavy supply has been refundings and state and local general obligation bonds, which contributed to the sell-off in the middle of the curve. “It added substantially to the volume of intermediate and long intermediate paper, while providing precious little long-term paper,” Friedlander wrote. As a result, the biggest sell-off came in the seven-15-year portion of the curve.
Friedlander does not expect a sell-off to continue. “We do not expect to see muni yields rose substantially unless the entire interest rate regime moves higher, led by Treasuries.”
The backup in yields over the past week hasn’t slowed the returns on munis. Year-to-date ending March 7, the Bank of America Merrill Lynch U.S. Municipal Master index returned 2.352%, beating the Treasury bond index which returned a negative 0.193%.
However, munis look less attractive when looking just at the month of March. For the month ending March 7, the muni index returned negative 0.468%, falling short of the Treasury index which returned 0.043%.
The 10- to 30-year slope of the curve fell during the past week as investors continued to move further out on the curve despite a slight increase in rates. The slope fell to 126 basis points on Friday from 136 basis points the week prior. The slope has continued its descent from the beginning of the year when it stood at 169 basis points.
