NEW YORK – The tax-exempt market is weaker Friday, making a four-day losing streak that has pushed muni losses into double digits.
“Things are trading all over the place but I’m seeing deep discounts,” a Southwest trader said, referring to a few deals that are being offered in the market. “People are licking their wounds for a little.”
“Only people that don’t own bonds are happy about the rise in yields and there are not many people out there,” he said. “And as long as Treasuries are falling, we are treading water. Muni-to-Treasury ratios have to get better to ultimately get people back in the market.”
The iShares Standard & Poor’s National Municipal mutual fund is off its high of about 114. “It has gotten back in line,” the trader said. “there was a premium that got built in and is now washed out. We are about seven basis points off from the top.” The fund is currently trading around 107.67.
Munis were much weaker early Friday afternoon, according to the Municipal Market Data scale. Yields inside three years rose up to two basis points while the four-year yield jumped four to six basis points. The five- and six-year yields increased up to four basis points. Outside seven years, yields spiked between three and six basis points.
On Thursday, the two-year yield closed four basis points higher at 0.34% while the 10-year yield jumped four basis points to finish at 2.21%. The 30-year yield ended flat at 3.40%.
Before the big losses this week, the two-year yield had not been this high since Jan. 27. The 30-year yield hasn’t risen to this level since Jan. 10. The 10-year muni hadn’t seen these levels since Dec. 5, 2011.
Treasuries were slightly weaker on the short-end. The two-year yield rose one basis point to 0.38% while the benchmark 10-year yield jumped two basis points to 2.31%. The 30-year was steady at 3.42%.
Over the past week, muni-to-Treasury ratios have fallen as munis outperformed Treasuries and became relatively more expensive. Since munis started weakening on Tuesday, the five-year ratio fell to 84.4% from 86.8% at the start of the week. The 10-year ratio fell to 96.9% from 99.5%. The 30-year ratio fell to 99.7% from 103.8% on Monday.
The 10- to 30-year slope of the curve fell this week as investors went further out on the yield curve. The slope fell to 119 basis points on Thursday from 127 basis points at the beginning of the week.
Looking to next week, the municipal market can expect $7.95 billion in new bonds, up from a revised $5.52 billion this week. On the negotiated calendar, $6.51 billion is expected, up from this week’s revised $4.47 billion. In competitive deals, $1.44 billion is expected, up slightly from this week’s revised $1.04 billion.
