NEW YORK – Activity in the tax-exempt market started to slow down Friday afternoon as traders closed their books for the week.
One New York trader said the market was very slow, and it was hard to tell which directions munis were going.
Munis were mostly steady Friday, according to the Municipal Market Data scale. Yields inside eight years were steady while yields outside nine years fell up to one basis point.
On Thursday, the two-year yield closed flat at 0.31% for the 17th consecutive trading session. The 10-year yield rose two basis points to 1.76% while the 30-year yield increased one basis point to 3.09%.
The 10-year yield remains eight basis points above its record low of 1.68% set Jan. 31. The 30-year remains one basis point above the record low of 3.08% set Wednesday.
Treasuries continued to gain. The benchmark 10-year yield and the 30-year yield each dropped four basis points to 1.85% and 3.02%. 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 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.
“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,” 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.”
