NEW YORK — Muni trading is pretty inactive Friday afternoon as traders believe next week will see greater opportunities.
“We’re preparing for a little more supply next week, so muni spreads to Treasuries have widened out,” said a trader in New York. “It hasn’t been picked up on the MMD scale, but it feels like it’s widened.”
Tax-exempts maturing between 2015 and 2025 saw yields rise a basis point in early trading, while other maturities were flat, according to Municipal Market Data. A mid-day update hasn’t been posted.
“There are fewer places to go with pedestrian bonds but there is still money out there for the right thing,” he added. “There continues to be some appetite but buyers are less interested in these levels. There’s not a whole lot of supply to drive it either way. People are hoping for supply and that spreads will widen.”
Treasuries were softer at the open but have since reversed course, albeit modestly. The benchmark 10-year yield is a basis point firmer at 2.07%, the two-year yield is two basis points firmer at 0.17%, and the 30-year yield is three basis points down at 3.63%.
Equities continue to gyrate but remain on track for a fifth straight gain. The Dow Jones Industrial Average was up as much as 0.86% at mid-morning; it then dipped into red ink before noon but has since recovered. It’s currently up 56 points, or 0.49%.
“That volatility isn’t helping,” the New York trader said. “It sort of crosses over into bonds. People become wary and it’s hard to get excited about stuff.”
He said market players are hoping muni to Treasury spreads widen, because there is sideline money just waiting for rates to become attractive and be put to work. Yet buyers realize rates can’t go too high, and that’s dampening selling pressure.
“Nobody is confused about this low rate environment,” he said. “We’ll be here for a while. People will be paid to be patient.”
The Bond Buyer’s 30-day visible supply ticked up to $11.35 billion Thursday from $11.197 billion a day before. As recently as August 26 it was just $3.5 billion.
Major deals next week include a $2.6 billion general obligation deal from California, a $265 million offering from Arizona’s Salt River Project, a $260 million deal from Connecticut’s Health and Educational Facilities Authority, and a $250 million refunding deal from Wisconsin.
“Guys are looking for something out of the ordinary, a callable bond or maybe a higher-yielding bond, something to get an edge,” a trader in Chicago said. “But it’s like skating on ice with rollerblades on – it’s hard to get an edge.”
Tax-exempt yields have weakened the past two days, coming off record lows earlier in the week. The 10-year muni yield backed up five basis points over the last two sessions to 2.12% and the 30-year yield moved four basis points higher to 3.70%.
The two-year yield, after holding steady for 25 consecutive sessions at its lowest level in more than 40 years, rose two basis points Thursday to 0.32%.
Muni-Treasury ratios finished Thursday lower but levels remain attractive enough to draw in crossover buyers. The 10-year ratio is 101.4%, the lowest of September. The 30-year ratio is 110.1%.
Triple-B rated munis currently offer an absolute yield of 4.17%, MMD says, or 199.5% of the 10-year Treasury rate. Earlier in the month that ratio was as high as 214.6%.
