The tax-exempt market opened the week Monday on a mostly steady tone as traders said the market was quiet across the board.
Most market participants agreed that buyers were waiting for the $5.42 billion in issuance to sell later this week.
“Mondays are setting the table for the rest of the week,” a Chicago trader said. “The calendar is light and of the calendar, a lot is taxable. So there are some residual balances from new loans last week that will be picked at but overall it feels like the dealer community is medium to light in inventory. I am not seeing a lot of bonds offered from trading accounts.”
He continued that munis are trading sideways today. “Treasuries are a smidge softer and that’s giving people pause. The technicals are somewhat modest but we will see some flows this week.”
He added that Treasuries outperformed last week, pushing muni-to-Treasury ratios higher. “Those moves took ratios to levels where a lot of bonds were put away.”
Quiet trading persisted throughout the day. “It’s pretty slow right now,” a trader located in the Southwest region said. “There is some decent stuff out for bid but there’s just not a lot going on.”
In the secondary market, trades compiled by data provider Markit showed a mix of firming and weakening.
Yields on California’s Golden State Tobacco Securitization Corp. 5.75s of 2047 plunged seven basis points to 6.11% while San Antonio Electric and Gas 5.25s of 2025 fell two basis points to 2.27%.
Yields on Ohio’s Miami University, 4s of 2027 and Dormitory Authority of the State of New York 5s of 2034 fell three basis points each to 2.83% and 2.90%, respectively.
Still, other trades were weaker. Yields on Puerto Rico Electric Power Authority 5s of 2020 and Oklahoma Municipal Power Authority 4s of 2043 rose two basis points each to 3.75% and 3.69%, respectively. Yields on New York City Municipal Water Finance Authority 3.75s of 2047 rose one basis point to 2.83%.
Municipal bond market scales ended steady to one basis point weaker.
Yields on the Municipal Market Data triple-A GO scale ended as much as one basis point higher. The 10-year yield and the 30-year yield rose one basis point each to 1.79% and 2.91%, respectively. The two-year closed at 0.31% for the 10th straight session.
Yields on the Municipal Market Advisors 5% coupon triple-A benchmark scale closed as much as one basis point higher. The 10-year and the 30-year yield ended flat at 1.82% and 2.98%, respectively. The two-year was steady at 0.33% for the fifth session.
Treasuries ended weaker Monday. The benchmark 10-year yield and the 30-year yield jumped two basis points each to 1.87% and 3.09%, respectively. The two-year was steady at 0.25%.
Year-to-date through Monday, yields on triple-A tax-exempts are about where they started the year, while single-A rated yields have compressed significantly, showing investors continue to move down in credit quality in search for yield.
The five-year triple-A muni yield fell to 0.76% from 0.84% at the beginning of the year while the single-A five-year yield plummeted to 1.18% from 1.38%.
The 10-year triple-A muni yield rose slightly to 1.79% from 1.78% while the single-A 10-year yield fell to 2.42% from 2.50%.
The 30-year triple-A yield jumped to 2.91% from 2.86%, but the single-A 30-year yield increased about the same to 3.56% from 3.53%.
And spreads have compressed across the curve. The two-year triple-A to single-A spread compressed to 24 basis points on Monday from 30 basis points at the beginning of the year. The five-year spread also compressed to 42 basis points from 54 basis points.
Similarly, the 10-year triple-A to single-A spread came in to 63 basis points from 72 basis points at the start of 2013. The 30-year spread tightened just slightly to 65 basis points from 67 basis points.
Still, the slope of the yield curve has steepened throughout the year as investors shorten duration. The one- to 30-year slope steepened to 271 basis points on Monday from 264 basis points at the beginning of 2013. The one- to 10-year slope steepened to 159 basis points to 156 basis points.
After a good start in January, munis struggled in February and may continue to underperform in March, according to some market participants. “March traditionally is the worst month for tax-exempt bonds investors, as average performance has been slightly negative during the month,” wrote Anthony Valeri, market strategist at LPL Financial.
Indeed, average monthly index returns from the Barclays Municipal Bond Index show that since 1990, March was the only month with negative returns. After March, October had the lowest monthly performance for March, coming in just positive. All other 10 months posted returns ranging from 0.25% to 1.00% in March.
The biggest factor, according to Valeri, is tax season. “The approach of April 15 is the primary reason why the municipal market has suffered in March. Since municipal bonds are typically owned by higher net worth, higher tax-bracket investors, municipal bonds are often subject to heavier selling in March as investors raise cash to pay taxes on capital gains from other investments.”
Limited reinvestment money is also a headwind for March performance. “March has typically been one of the lightest months in terms of maturing bonds, leaving investors fewer proceeds to reinvest into the municipal bond market,” Valeri noted. “In sum, the combination of tax season along with limited reinvestment demand creates a short-term supply-demand challenge for the municipal market.”
Valeri doesn’t expect a big turnout from February’s recent weakness. “Bond dealers have become less aggressive for fear of taking losses on existing holdings,” he noted. “The value of bonds available for sale in the market increased steady in recent weeks; we see this as a sign bond dealers are looking to unload inventory.”
Additionally, “municipal valuations have not cheapened substantially to draw in additional buyers,” he said. “Municipal-to-Treasury yield ratios have increased but remain at the low end of recent ranges.”