NEW YORK – The tax-exempt market is stronger Monday, following Treasuries, but is quieter than last week as traders await the arrival of new deals.
“It’s very quiet today,” a Los Angeles trader said.
Munis were stronger in early afternoon trading, according to the Municipal Market Data scale. Yields inside six years were steady while the seven- to 14-year yields fell up to three basis points. The 15- to 21-year yields were flat. Yields outside 22 years fell between one and two basis points.
On Friday, the two-year yield closed steady at 0.27%, one basis point above its record low. The 10-year yield and the 30-year yield held steady at 2.05% and 3.31%.
Treasuries were stronger. The benchmark 10-year yield fell two basis points to 2.02% while the 30-year yield dropped three basis points to 3.16%. The two-year was steady at 0.33%.
In the primary this week, the tax-exempt market can expect $5.81 billion in new issuance, down from last week’s revised $9.36 billion. In negotiated deals, $4.73 billion is expected, down from last week’s revised $7.36 billion. On the competitive calendar, $1.18 billion is expected to come to market, down by almost half from last week’s revised $2 billion.
Bank of America Merrill Lynch priced for retail $120 million of Lee County, Fla., School Board bonds, rated Aa3 by Moody’s and AA-minus by Standard & Poor’s. Institutional pricing is expected Tuesday. Pricing details were not yet available.
Over the past week, muni-to-Treasury ratios rose as munis underperformed Treasuries and became comparatively cheaper. The five-year ratio jumped to 87.8% on Friday from 83.3% the week prior. The 10-year ratio moved to 100.5% from 96.5% the week before.
The surge of supply last week was the main factor in moving ratios higher. “Even though it may have been somewhat more difficult to place all of a transaction, some deals were upsized once again,” wrote John Hallacy, municipal research strategist at Bank of America Merrill Lynch, referring to last week when the year-to-date’s largest weekly supply hit the market. “The greatest change since last week has been the back up in the 10-year ratio. It is clear that the ‘belly of the curve’ has been most affected by [last] week’s change.”
The backup in yields over the past week hasn’t slowed the returns on munis. Year-to-date ending March 7, the Bank of America Merrill Lynch U.S. Municipal Master index returned 2.352%, beating the Treasury bond index which returned a negative 0.193%.
However, munis look less attractive when looking just at the month of March. For the month ending March 7, the muni index returned negative 0.468%, falling short of the Treasury index which returned 0.043%.
The 10- to 30-year slope of the curve fell during the past week as investors continued to move further out on the curve despite a slight increase in rates. The slope fell to 126 basis points on Friday from 136 basis points the week prior. The slope has continued its descent from the beginning of the year when it stood at 169 basis points.
