NEW YORK – The tax-exempt market is stronger Friday, but traders say the big players aren’t participating.
“There is a lot of internal distribution going on,” said a trader in Chicago. “There are various firms and retail systems, but I’m not seeing a tremendous amount of institutional activity.”
He added a decent amount of institutional customers don’t like the market and at some of the retail shops, there is still cash to put to work. “To get the yields that retail finds attractive there is some extending going on. People continue to take call risk and next week is a more taxable slate, so supply is still going to be constrained.”
The Chicago trader added that institutional players aren’t getting into the market for a few reasons. “Would you rather buy a 10-year muni at 2% or take a shot at some technology stock? If you’re capital preservation and that’s you’re only goal, munis make sense,” he said. “But if you need capital appreciation and income, there are other asset classes that give you better potential.
Munis continued to firm Friday early afternoon, according to the Municipal Market Data scale. Yields inside the five-year were flat while yields on the six-year to nine-year fell one basis point. The 10-year to 11-year yield dropped two basis points and the 12-year year plummeted between two and four basis points. The 13-year to 19-year yields dropped the most, plunging four to six basis points. Yields fell four basis points on the 22-year and two basis points on the 23-year maturity. Yields outside the 24-year maturity .fell one basis point.
On Thursday, the two-year yield closed flat at 0.42% for its third consecutive trading session. The 10-year yield closed down one basis point to 1.87% and the 30-year fell three basis points to 3.54%.
Treasuries continued to firm Friday afternoon. The benchmark 10-year yield and the 30-year yield fell four basis points each to 1.96% and 3.02%, respectively. The two-year yield held steady at 0.27%.
In the secondary market Friday, trades reported by the Municipal Securities Rulemaking Board showing firming during the week.
Bonds from an interdealer trade of Detroit Water Supply Systems 5.25s of 2041 yielded 5.04%, 19 basis points lower than where they traded the week prior.
Bonds from an interdealer trade of New York Liberty Development Corp. 5s of 2041 yielded 4.08%, nine basis points lower than where they traded the week prior.
A dealer sold to a customer Allegheny County, Pa., Sanitary Authority 5s of 2021 at 2.08%, two basis points lower than where they traded the week before.
Municipal bond funds saw their fifth consecutive week of inflows, with $523 million of net inflows for the week ending Jan. 3, Lipper FMI said. This is after $362 million of net inflows for the week ending Dec. 28.
Assets for funds that report their flows weekly rose somewhat to $271.8 billion from $270 billion the previous week.
“These inflows come as no surprise,” said MMD’s Daniel Berger. “There is little doubt that January re-investment needs estimated at approximately $20 billion should, by far, outstrip issuance during the next few weeks. Another hint of muni inflows was the modest flattening of the muni yield curve. With more retail fund buyers, there could be more demand in the longer end of the muni market and during this heavy reinvestment period the muni curve is likely to see flattening in the foreseeable future.”
Looking ahead to next week, the municipal market can expect almost $4 billion to come to market, up from a revised $384.9 million this week. In the negotiated market, $2.15 billion is expected to be priced, up from a revised $204.3 million. On the competitive calendar, $1.83 billion is expected to be issued, up from this week’s revised $180.5 million.
