The tax-exempt market ended stronger Wednesday, extending an eight session streak of steady or lower yields.
Traders said that while volume started to dwindle due to the Yom Kippur holiday, trades were still stronger.
“It’s a little stronger out there today and I think volume is surprisingly light given the Jewish holiday,” a Los Angeles trader said. “But California GO’s traded up this week and it seems like a decent market tone.”
Other traders agreed the market was firmer. “Munis are up again,” a New York trader said.
In the primary market, Bank of America Merrill Lynch priced for retail $392 million of Port of Oakland, Calif., bonds, rated A2 by Moody’s Investors Service and A-plus by Standard & Poor’s and Fitch Ratings. Institutional pricing is expected Thursday. Pricing details were not available by press time.
“Levels look decent but I haven’t heard much,” the Los Angeles trader said, referring to the Oakland deal. “We’ve shown it out but it’s quiet from the holiday.”
In other primary market news, PNC Capital Markets priced for retail $169 million of Allegheny County, Pa., general obligation bonds, rated A1 by Moody’s and A-plus by Standard & Poor’s. Institutional pricing is expected Thursday. The first series consists of $115 million of GO debt followed by $54 million of refunding bonds. Prices were not yet available.
In the secondary market, trades compiled by data provider Markit showed mostly strengthening. Yields on Pennsylvania 5s of 2022 and Harris County, Texas 5s of 2022 fell three basis points each to 1.92% and 1.93%, respectively.
Yields on New York 5s of 2023 and Texas 5s of 2041 dropped two basis points each to 2.27% and 3.05%, respectively. Yields on California 5s of 2018 fell one basis point to 1.42%.
On Wednesday, the 10-year and 30-year Municipal Market Data yields fell four basis points each to 1.73% and 2.90%, respectively. The two-year was steady at 0.30%.
Treasuries ended stronger for the fourth consecutive session. The benchmark 10-year yield and the 30-year yield plunged six basis points each to 1.62% and 2.79%, respectively. The two-year yield fell one basis point to 0.26%.
So far this month and this year, municipal bonds have generally performed well as recorded by the Standard & Poor’s municipal bond indexes. The S&P National AMT-Free Municipal Bond Index has returned 0.38% so far in September and 5.76% so far this year. The S&P Taxable Municipal Bond Select Index returned 1.14% through September and 8.91% so far this year.
In terms of credit quality, the high-yield index has blown the rest of the market away. The S&P Municipal Bond High Yield Index returned 0.90% in September and 14.06% year to date. That compares with the S&P Municipal Bond Investment Grade Index which returned 0.43% in September and 5.78% so far this year.
Sectors, such as nursing and tobacco bonds have outperformed the rest of the market. Through Tuesday, the S&P Municipal Bond Nursing index returned 0.66% and 11.29% year to date. The S&P Municipal Bond Tobacco Index returned 0.88% month to date and a whopping 16.48% so far this year.
And while there are concerns over lower-rated municipalities, credits like California and Illinois have performed well as the search for yield in the low-rate environment continues. The S&P Municipal Bond California Index returned 0.60% so far in September and 7.22% year to date. The S&P Municipal Bond Illinois Index returned 0.56% this month and 7.46% so far this year.
But not all lower-rated state credits have performed well. The S&P Municipal Bond Puerto Rico Index returned a negative 0.80% this month — one of only two state credits to have a negative return in September. So far this year, the index has returned 5.12%.
And even in the secondary market Wednesday, Yields on Puerto Rico Sales Tax Financing Corp. 5s of 2043 rose two basis points to 4.55%.
And while this hunt for yield has pushed investors into lower-rated and lower-quality munis, it has also forced investors to extend duration. Dorian Jamison, municipal analyst at Wells Fargo Advisors, said the long-end of the yield curve is overbought and there is more value in the short and intermediate range of the curve.
Jamison recommends the seven- to 10-year range in the AAA and AA general obligation debt space. “Investors may want to consider taking profits generated from this year’s run-up on the long end of the yield curve and reinvesting in short and intermediate maturities,” he wrote, adding that would help mitigate against interest-rate risk and reinvestment risk.
Jamison adds that at 101%, the 30-year muni-to-Treasury ratio looks cheap, but maybe reverse course soon. “Even though the 30-year ratio remains historically cheap, it has fallen below its year-to-date average of 108%, which could cause demand for muni long bonds — from cross-over buyers — to wane.
The 10-year muni-to-Treasury yield ratio at 104% looks cheap compared to its year to date average of 103%. “This relative cheapness of the 10-year ratio can continue to attract demand from crossover buyers, which would support valuations in the intermediate range of the yield curve.”
Jamison also added premium bonds may provide a safe haven to investors now. “Many investors avoid premium bonds simply because the bonds are priced above par, and retail investors generally do not like paying more to buy a bond than they will receive at maturity, even though the higher cash flows from the higher coupon bond offset that premium paid over time,” he noted.