NEW YORK – Activity in the tax-exempt market started to slow Friday as munis looked to take a rest from a strong week.
While yields ended lower for the week, munis did show some soft spots Thursday and Friday.
“I would say they are selling a bit,” a New York trader said Friday afternoon. “I am getting counters on bids. It’s a smidge lower.”
He added the news coming from JPMorgan’s $2 billion trading loss is actually helping munis a little. “I think the news might have helped a little, but munis have also been weaker the latter part of this week.”
Still, during the course of the week, the 10-year yield fell seven basis points to close Friday at 1.75% – just seven basis points above its record low of 1.68% set Jan. 31. The 30-year yield also dropped seven basis points throughout the week to finish at 3.08% – touching its record low as recorded by Municipal Market Data initially set on Wednesday.
The two-year yield remained steady at 0.31% for the 18th consecutive trading session.
Treasuries gained Friday and were also stronger for the week. The benchmark 10-year yield and the 30-year yield each dropped four basis points to 1.85% and 3.02% on Friday. The two-year yield fell one basis point to 0.26%.
Looking to next week, the municipal market can expect $7.18 billion in new issuance, up from this week’s revised $5.81 billion. In the negotiated market, $5.51 billion is expected to come to market, up from this week’s revised $4.12 billion. On the competitive calendar, $1.67 billion is expected to be priced, down slightly from this week’s revised $1.69 billion.
As yields have fallen to near record lows this week, market participants continue to move down the credit scale in search of yield.
High-yield municipal bonds have outperformed the overall muni market, returning over 8.5% year to date as measured by the Standard & Poor’s High Yield index. That compares to the 3.75% returns for investment grade bonds, as measured by the Standard & Poor’s AMT-Free Municipal Bond index.
Over the past 12 months, high-yield muni bonds have returned 17.99% compared to 12.62% for investment grade bonds, according to JR Rieger, vice president of fixed income indexes at Standard & Poor’s.
“The yield spread differential between high yield municipal bonds and investment grade municipal bonds has narrowed by over 60 basis points since year end ending at 341 basis points,” Rieger wrote. “The last time the spread differential was nearly this low was December 2010. The spread narrowing indicates the market is willing to take on more risk for higher yield.”
The yield curve also continues to flatten as investors extend duration in search for yield. After reaching a high on March 20, the spread between the Standard & Poor’s AMT-Free Municipal Series 2013 index and the 2021 index compressed to 206 basis points on Thursday from 253 basis points.