NEW YORK – The tax-exempt market continued to lose momentum Friday, as yields rose across the curve following big losses Thursday.
“If the music was slowing down, today it stopped. At least for a little while Friday morning,” a New York trader said. “Dealers who have been long munis throughout this rally, endeavored to preserve some profit by putting items out for the bid in the brokers’ market.”
He added, “For some, even with significant upward adjustments in yield to the scale and the wider bid-offer spread, there were still profits to be had. Customers have been largely quiet so far today, in contrast to their large sell lists yesterday.”
Munis continued to weaken Friday afternoon, according to the Municipal Market Data scale. Yields inside two years were steady. Yields on the three-year to five-year rose two basis points while the six-year rose two to four basis points. The seven-year yield jumped five to seven basis points. Outside eight years, yields spiked up six to 10 basis points.
On Thursday, the 10-year yield finished up seven basis points at 1.74%. The 30-year yield jumped 10 basis points to 3.25%. The two-year closed steady at 0.35% for its fourth consecutive trading session.
Thursday was the first day of weakening this year. Before that, the 10-year and 30-year muni yields broke record lows for six consecutive trading sessions, falling 15 and 25 basis points, respectively.
Treasuries continued to weaken throughout the day Friday. The benchmark 10-year yield rose four basis points to 2.02% and the 30-year yield jumped five basis points to 3.09%. the two-year was steady at 0.25%.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed weakening over the past two days.
Bonds from an interdealer trade of Massachusetts School Building Authority 5s of 2041 yielded 3.64%, 24 basis points higher than where they traded Wednesday – the first day munis were weaker in 2012.
Bonds from another interdealer trade of New York Liberty Development Corp. 5s of 2041 yielded 3.87%, 22 basis points higher than where they traded Wednesday.
A dealer sold to a customer California 7.6s of 2040 at 5.37%, 13 basis points higher than where they traded Wednesday.
Bonds from an interdealer trade of Los Angeles County Sanitation District 4.5s of 2038 yielded 4.57%, five basis points higher than where they traded Wednesday.
Since the beginning of the year, muni-to-Treasury ratios have fallen. On Thursday, ratios continued to fall as munis outperformed Treasuries. The five-year muni-to-Treasury ratio fell to 93% on Wednesday from 98.9% on the first day of trading in 2012. The 10-year ratio fell to 87.9% from 96.4% and the 30-year ratio fell to 106.9% from 119.4% on the first day of trading this year.
Looking ahead to next week, the new issue market can expect $4.5 billion in bonds, up from this week’s $3.1 billion. On the negotiated calendar, $3.8 billion is expected to come to market, up from this week’s $1.9 billion. In the competitive market, $735.6 million is expected to be issued, down from this week’s $1.2 billion.