NEW YORK – The tax-exempt market was soft Friday as munis failed to hold up against a deluge of new supply. Positive economic news also helped to push munis lower, following Treasuries.
“Munis are slightly weaker with slightly more retail and institutional interest,” a Texas trader said.
Munis were mixed Friday morning, according to the Municipal Market Data scale. Yields inside four years were steady while the five- and seven-year yields were steady to one basis point higher. The eight- and nine-year yields were flat to one basis point lower. Yields outside 10 years were steady.
On Thursday, the two-year yield closed up one basis point to 0.27%, pulling off the record low of 0.26% it held since Feb. 16. The 10-year yield jumped two basis points to 2.05%, closing above 2.00% for the second time since Dec. 7. The 30-year yield rose one basis point to 3.31%.
Treasuries were weaker on positive news from Greece. The benchmark 10-year yield rose two basis points to 2.05% while the 30-year yield jumped three basis points to 3.21%. The two-year was flat at 0.32%.
In economic news, non-farm payroll employment rose 277,000 in February while the unemployment rate remained at 8.3%.
The increase was higher than the 210,000 gain expected by economists.
“U.S. economy watchers can breathe a sigh of relief for now as employment growth – with the upward revisions to the last two months – exceeded expectations and the economy created enough jobs to absorb re-entrants into the labor market,” wrote economists at RDQ Economics. “Perhaps the best sign of strength is the double-digit increase in hours worked in manufacturing over the last three months.”
In other economic news, the U.S. international trade deficit grew 4.37% in January to $52.6 billion, based on $180.8 billion of exports and $233.4 billion of imports. The deficit was larger than the $49 billion expected by economists.
“Surging imports of autos were a major factor behind the wider trade gap in January as imports outpaced,” wrote RDQ economists. “Our view of this report is that it shows trade flows are active, which is a tremendously important growth signal.”
Muni-to-Treasury ratios have risen as munis underperformed Treasuries and became cheaper. The five-year ratio jumped to 88.6% on Thursday from 77.8% on March 1 when munis began weakening. The 10-year muni-to-Treasury ratio spiked to 101.5% on Thursday from 93.6% at the beginning of the month. The 30-year ratio rose to 104.1% from 103.8%.
The 10- to 30-year slope of the curve has also collapsed. On Thursday, the slope closed at 126 basis points, down from 169 basis points at the beginning of the year.
Despite the rise in yields recently, credit spreads have continued to fall as muni investors go down the credit scale in search for yield. The triple-A to single-A two-year muni credit spread fell to 43 basis points on Thursday from 56 basis points at the beginning of the year. Since munis started weakening last week, the spread has fallen from 44 basis points.
The 10-year triple-A to single-A spread has collapsed, falling to 88 basis points from 96 basis points at the beginning of the year. Since munis started weakening last week, the spread fell from 90 basis points.
The 30-year triple-A to single-A spread has fallen throughout the year to 81 basis points on Thursday from 89 basis points at the beginning of the year. The spread has fall from 82 basis points since munis started weakening last week.
