The tax-exempt market opened the first week of February on a quiet note as traders waited for primary supply to hit the market later in the week.
Secondary trading activity was also muted as market participants said the Monday after Super Bowl was typically quiet.
“It’s absolutely dead,” a Chicago trader said. “There is no calendar this week – it’s dismal. The secondary is trading by appointment. It’s just one of those days. But it’s expected. The Monday after Super Bowl is the least productive work day of the year.”
Activity was muted all day, according to other traders. “Munis are quiet right now,” a New York trader said. “They are not doing much. Just quiet.”
The lack of a primary calendar isn’t helping to spur activity. The municipal bond market can expected $4.79 billion in new issuance, down from last week’s revised $5.98 billion. In negotiated deals, $2.96 billion is expected to hit the market, down from last week’s revised $4.48 billion. On the competitive calendar, $1.83 billion is expected to be auctioned, up from last week’s revised $1.6 billion.
“The dealers that are holding inventory should be able to move some with so little to choose from on the primary,” wrote Dan Toboja, vice president at Ziegler Capital Markets. “Until the inflows reverse, yields will continue in the range they’ve been.”
In the secondary market Monday, trades compiled by data provider Markit showed a mix of strengthening and weakening.
Yields on Illinois’ Railsplitter Tobacco Settlement Authority 4.125s of 2016 and Tampa Bay Water Regional Supply Authority 5s of 2032 fell three basis points each to 1.44% and 2.82%, respectively.
Yields on Indiana Finance Authority 5s of 2042 and New York’s Metropolitan Transportation Authority 5s of 2043 fell one basis point each to 3.78% and 3.44%, respectively.
Other trades were weaker. Yields on Mendocino-Lake, Calif., Community College District 0s of 2046 and New Jersey Transportation Trust Fund Authority 5s of 2042 rose one basis point each to 4.20% and 3.56%, respectively.
Municipal bond market reads showed a steady to slightly firmer market Monday after steady or small gains Thursday and Friday of last week.
Yields on the Municipal Market Data triple-A GO scale finished steady to one basis point lower. The 10-year and 30-year yields fell one basis point each to 1.81% and 2.85%, respectively. The two-year held at 0.34% for the sixth session.
The Municipal Market Advisors 5% coupon triple-A benchmark scale also showed mostly unchanged yields. The 10-year yield and the 30-year yield held at 1.84% and 2.94%, respectively, for the fourth consecutive trading session. The two-year closed unchanged at 0.35% for the sixth session.
Treasuries posted gains Monday across the curve. The benchmark 10-year yield and the 30-year yield dropped four basis points each to 1.97% and 3.17%, respectively. The two-year yield fell one basis point to 0.26%.
Over the course of January, muni-to-Treasury ratios fell as munis outperformed Treasuries and became relatively more expensive.
The five-year muni yield to Treasury yield ratio dropped to 89.8% from 110.5%. The 10-year ratio fell to 90.5% at the end of the month from 96.7% on Jan. 2. The 30-year ratio also fell to 89.1% from 93.8% at the beginning of January.
The slope of the muni yield curve steepened throughout January as investors sold bonds on the long-end.
The one- to 30-year slope of the curve rose slightly to 266 basis points at the end of January from 264 basis points at the beginning of the month. The one- to 10-year slope of the curve steepened to 162 basis points from 156 basis points at the beginning of January.
Credit spreads tightened throughout January as investors moved further down on the credit scale in search for yield.
The two-year triple-A to single-A spread compressed to 25 basis points at the end of January from 30 basis points at the beginning of the month. The five-year spread also compressed to 51 basis points from 54 basis points at the start of January. The 10-year spread fell to 68 basis points from 72 basis points while the 30-year spread tightened to 63 basis points from 67 basis points at the beginning of the year.
Exchange-traded funds that invest in municipal bonds have performed well in January.
The iShares S&P National AMT-Free Municipal Bond ETF — ticker MUB — was up 1.15% for January while the SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF — ticker SHM — rose 0.16% for the month.
The PowerShares Insured National Muni Bond ETF — ticker PZA — also rose 0.16% for the month while the Market Vectors High Yield Municipal Index ETF — ticker HYD — jumped 1.15% in January.
Meanwhile, the Market Vectors Long Municipal Index ETF — ticker MLN — recorded a positive 0.84% for the month.
And most muni ETFs outperformed Treasury ETFs for the month. The ProShares Ultra Seven to 10 Year Treasury ETF — ticker UST — fell 2.22% in January.
J.R. Rieger, vice president of fixed income at Standard & Poor’s Dow Jones Indices said municipal bonds outperformed in January. The S&P National AMT-Free Municipal Bond Index returned a positive 0.69% in January. The weighted average yield to worst for the bonds is 1.97%, or a taxable equivalent of over 3.00%.
That compares to the Dow Jones Corporate Bond Index which yields over 2.6% yield to worst. “So municipal bonds are still incrementally higher in yield than their counterparts in the corporate bonds index,” Rieger said.
