The tax-exempt market continued its rally Tuesday as positive supply and demand factors, as well as weaker stock markets due to European worries, buoyed safe haven assets.
The 10-year and 30-year munis yields set new record lows again on Tuesday following the taxable market.
“Weak Richmond Fed data is causing munis to rally once again,” a trader in Atlanta said. “There is not much value left in the long end, at least for me. I’ve been a net seller of munis the last 3 months and rotated into preferred stocks for more yield.”
Other traders said the market had a tough time climbing higher in the morning as yields are already at record lows. “Munis are sideways,” a New York trader said. “There are still buyers out there though, but the market is just not moving up or down.”
Still, munis were stronger again Tuesday, according to the Municipal Market Data scale. Yields inside four years were steady while yields outside five years plummeted as much as three basis points from already record low levels.
The two-year closed at 0.31% for the seventh consecutive trading session. The 10-year yield plunged three basis points to 1.62%, breaking the previous record low of 1.65% set Monday. The 30-year yield fell one basis point to set a new record low of 2.80%, breaking the previous record of 2.81% set Monday.
Tuesday marked the 22nd consecutive trading session where munis traded steady or firmer. Since the most recent rally began on June 22, yields on the 10-year have fallen 24 basis points while the 30-year yield has plunged 36 basis points.
Munis followed Treasuries higher on poor economic data. The benchmark 10-year yield dropped three basis points to 1.41% while the 30-year yield plunged five basis points to 2.47%. The two-year yield rose one basis point to 0.23%.
All major indexes dropped. The Dow Jones Industrial Average fell 103.08 points, or 0.81%, to 12,618.38. The S&P 500 index dropped 12.21 points, or 0.90%, to 1,338.31. The Nasdaq fell 27.16 points, or 0.94%, to 2,862.99.
European fears and weak domestic economic data, which include downward revisions to Friday’s second quarter GDP numbers pushed Treasury yields to new lows, wrote Anthony Valeri, market strategist at LPL Financial, adding the low Treasury yields spurred gains in the investment-grade municipal bond market with triple-A rated MMD yields hitting fresh lows.
“Municipal bonds rallied alongside Treasuries benefiting from an improving supply-demand backdrop that will likely persist through the end of August,” Valeri wrote. “New issuance is expected to drop to a below average $6 billion this week, and measures of secondary supply are their lowest levels in months.”
In the primary market, Wells Fargo Securities priced $322 million of Los Angeles Department of Water and Power water system revenue bonds, rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s and Fitch Ratings.
The bonds yielded 2.99% with a 5% coupon in 2035, 3.05% with a 5% coupon in 2036, 3.08% with a 5% coupon in 2037, and 3.13% with a 5% coupon in 2043. The bonds are callable at par in 2022.
Morgan Stanley priced $280.1 million of taxable and tax-exempt Mississippi general obligation refunding bonds, rated Aa2 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch.
Yields on the first series, $57.1 million of taxable GO refunding bonds, ranged from 0.784% priced at par in 2015 to 2.414% priced at par in 2022. The bonds were priced 40 basis points to 100 basis points over the comparable Treasury yields.
Yields on the second series, $43.7 million of tax-exempt GOs, ranged from 0.59% with 2% and 5% coupons in a split 2015 maturity to 2.05% with 4% and 5% coupons in a split 2023 maturity. The bonds are callable at par in 2022.
Prices on the third series, $100.6 million of Libor index bonds for the Nissan North America Inc. project were not available by press time. Prices on the fourth series, $78.7 million of SIFMA index GO refunding bonds for capital improvement projects, were not available by press time.
In the competitive market, Bank of America Merrill Lynch won the bid for $361.3 million of Pennsylvania GO refunding bonds, rated Aa2 by Moody’s, AA by Standard & Poor’s, and AA-plus by Fitch. Yields ranged from 0.19% with a 3% coupon in 2013 to 1.93% with a 4% coupon in 2023.
In the secondary market, trades compiled by data provider Markit showed firming. Yields on Hudson Yards Infrastructure Corp. 5s of 2047 dropped four basis points to 3.65%.
Yields on Massachusetts Water Pollution Abatement Trust 5s of 2027 and Tidehaven, Texas, Independent School District 3.375s of 2035 each dropped two basis points to 2.23% and 3.47%, respectively. Yields on San Francisco Public Utilities Commission 5s of 2036 and Austin Water and Wastewater System 5s of 2042 fell one basis point each to 3.10% and 3.11%.
While muni yields have been falling for many consecutive sessions, analysts at Municipal Market Advisors note that yields could spike up for a short amount of time depending on Treasury yields which are likely to follow news out of Europe. Huge swings in Treasury yields, combined with a growing resistance against record low yields, could affect muni yields.
“Less professional investors may interpret any reversion or sharp swings in prices as a manifestation of the media’s view that systemic muni credit quality is under pressure,” wrote Matt Fabian, managing director. “Ostensible buyers should therefore remain only lightly committed to purchases at current levels: events may precipitate rapid price weakness and much better entry points for most municipal securities.”
While the muni rally has been impressive, it has lagged the Treasury rally. Since munis started a steady climb on June 22, ratios have risen on the short and intermediate part of the curve as munis underperformed Treasuries and became comparatively cheaper. The five-year muni-to-Treasury ratio jumped to 116.1% on Tuesday from 105.3% on June 22. The 10-year ratio increased to 114.9% from 111.4%.