NEW YORK – The tax-exempt market ended steady on Friday as traders recouped from an active week in munis.
Throughout the week, deals in the primary market were very well received and trades in the secondary showed munis were much stronger.
“We are very firm for the week,” a Chicago trader said. “There were two huge buyers – a high-grade buyer in the 10-year range and a state GO buyer in the 15-year range. They put a billion to work mostly in the primary and some in the secondary.”
He added that those buyers “gobbled up everything that was out there so the market is really firm and that calmed supply fears.”
Not only are there buyers and demand for muni bonds, but visible supply has dropped. “So things are very firm,” the trader said.
The market is also anticipating almost $25 billion of coupon payments coming due May 1 and June 1. “So you have $50 billion in cash coming on top of everyone already having cash on their books,” he said.
Indeed, munis were firmer according to data compiled by Markit. Yields on Pennsylvania Higher Educational Facilities Authority 5s of 2023 fell one basis point to 2.71%. Yields on Ohio 5s of 2020 dropped two basis points to 1.90% while Goose Creek Texas Consolidated Independent School District 5s of 2021 fell two basis points to 1.86%.
Throughout the week, the two-year yield fell two basis points while the 30-year dropped four basis points, according to the Municipal Market Data scale. The 10-year was the strongest, with yields falling nine basis points during the week.
On Friday, the two-year yield closed at 0.31% while the 30-year yield finished at 3.28%. The 10-year closed the week off at 1.88%.
Treasuries were steady to slightly weaker. On Friday, the benchmark 10-year and the 30-year yield each rose two basis points to 1.98% and 3.14%. The two-year was steady at 0.27%.
During the week, muni-to-Treasury ratios fell as munis outperformed Treasuries and became relatively more expensive. The five-year muni yield to Treasury yield fell to 100% from 102.4% last Friday. The 10-year ratio fell to 96.4% from 99% at the end of last week. The 30-year ratio rose slightly to 105.5% from 105.4%.
The slope of the yield curve fell to 308 basis points from 312 basis points the week before as investors move further out on the yield curve. But the 10- to 30-year slope of the curve rose to 140 basis points from 135 basis points last Friday – hinting investors bought munis in the 10-year spot faster than they bought 30-year munis.
Despite these small changes in the slope of the curve, J.R. Rieger, vice president of fixed income indices at Standard & Poor’s Indices, said the yield curve has remained relatively flat so far in 2012.
The difference in yields between the Standard & Poor’s AMT-Free Municipal Series 2013 index and the 2021 index fell to 215 basis points on Thursday from 225 basis points at the end of 2011.
Yield is also a priority for investors in the muni market. The Standard & Poor’s Municipal High Yield index has returned over 7.3% so far this year. “The yield spread differential between high yield municipal bonds and investment grade municipal bonds has narrowed by 78 basis points since year end ending at 342 basis points,” Rieger said. “The last time the spread differential was nearly this low was January 2011. The spread narrowing indicates the market is willing to take on more risk for higher yield.”
Looking to next week, the municipal market can expect $5.17 billion, off from this week’s revised $7.97 billion. In the negotiated market, $3.54 billion is expected to be priced, down from this week’s revised $5.59 billion. On the competitive calendar, $1.63 billion is expected to be issued, down from this week’s revised $2.38 billion.
