The tax-exempt market ended the week on a steady note with a recent impressive rally that has pushed muni yields to record lows expected to continue as long as demand continues to outweigh supply.
“Negotiated paper was eaten alive this week,” a Chicago trader said. “It’s getting to the point where there is such a fight for the negotiated. It’s nine times oversubscribed so you’re never getting the right allocation. You put in $10 million and you get $2 million. So it’s a scramble to put money to work.”
He added that by Friday, the tone was still firm, but much calmer. “It was a grind, but now there are not a lot of bonds out there so I’m seeing the same stuff that was there two weeks ago but just 20 basis points higher.” There is no selling pressure and not a lot of quality structures or interesting “yieldy” bonds, he said.
Looking ahead to this week, the trader said the technicals look positive. “I think we can firm next week,” he said. “We are still cheap as an asset class and percentage-wise. There is a lot of money out there and not a lot of bonds.”
Munis were steady Friday afternoon, according to the Municipal Market Data scale.
For the week, the 10-year muni yield fell eight basis points to 1.74%, hovering seven basis points above its record low of 1.67% set Jan. 18. The 30-year yield plummeted 16 basis points during the week to finish at 2.96%, beating the previous record low of 3.02% set on Wednesday. The two-year was steady at 0.32% for the 30th consecutive session.
The Treasury yield curve steepened Friday as yields on the short end fell while yields on the long end rose. The two-year yield fell one basis point to 0.26% while the 30-year yield rose one basis point to 2.58%. The benchmark 10-year was steady at 1.49%.
In the secondary market Friday, trades compiled by data provider Markit showed mostly firming. Yields on Dormitory Authority of the State of New York 4.25s of 2039 and Louisiana 5s of 2021 each fell one basis point to 4.13% and 1.87%, respectively. Yields on Cedar Park, Texas, 5s of 2019 fell one basis point to 1.55%.
Because muni yields on the week fell more than Treasury yields, the muni-to-Treasury ratio fell as munis outperformed and became relatively more expensive. The five-year ratio fell to 114.3% on Friday from 121.9% the week before. The 10-year ratio dropped to 116.8% from 117.4% at the end of the previous week. The 30-year ratio fell to 114.7% on Friday from 117.3% the week before.
The slope of the yield curve continued to flatten as investors move out further on the curve in search of yield. The one- to 30-year slope of the curve flattened to 276 basis points on Friday from 292 basis points the Friday before that. The one- to 10-year slope of the curve flattened to 154 basis points from 162 basis points at the end of the previous week.
Credit spreads on the short and long end have tightened so far in July as investors reach down the scale in search for yield. The five-year triple-A to single-A spread compressed to 63 basis points from 66 basis points at the beginning of July. The 30-year spread compressed to 77 basis points from 80 basis points at the beginning of the month.
