NEW YORK – Activity in the tax-exempt market slowed on Friday as dealers recovered from the biggest week of issuance so far in 2012. As munis recouped most of the losses that hit them beginning late last week, investors head into next week a little more wary about buying as yields remain at unattractive levels.
“Coming off the end of last week, yields were up 20 basis points on the 10-year so people were anxious about the calendar which was the biggest so far this year,” said a trader in Atlanta. “But with the strength of Treasuries, deals were very successful and helped the market to stay firm and trade up.”
He added because deals were received well this week, nervous investors calmed down. “There is definitely money to use, but when there are really less attractive levels, people are more hesitant. Coming into this week, we had more basis points to play with but I am not as excited about the potential for next week.”
Munis were steady to a little firmer Friday early afternoon, according to the Municipal Market Data scale. Yields inside four years were steady while yields outside the five-year mark fell up to two basis points across the curve.
On Thursday, the two-year muni yield closed steady at 0.35% for its 10th consecutive trading session. The 10-year and 30-year muni yields fell three basis points each to 1.79% and 3.27%.
Treasuries were steady across the board. The two-year and 30-year yields were flat at 0.22% and 3.10%. The benchmark 10-year yield fell one basis point to 1.93%.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming over the week.
Bonds from an interdealer trade of Barbers Hill, Texas, Independent School District 5s of 2035 yielded 3.28%, 18 basis points lower than where they traded Tuesday.
Bonds from another interdealer trade of Denver City and County School District 4s of 2027 yielded 2.76%, 11 basis points lower than where they traded Thursday.
Bonds from an interdealer trade of University of Puerto Rico 5s of 2024 yielded 4.00%, three basis points lower than where they traded Thursday.
A dealer bought from a customer New Jersey’s Tobacco Settlement Financing Corp. 5s of 2041 at 6.95%, three basis points lower than where they traded Wednesday.
Muni-to-Treasury ratios on the short end of the curve jumped this week as munis underperformed Treasuries. The five-year ratio catapulted to 100% on Thursday from 91.2% on Monday. The 10-year jumped to 91.5% from 90.8%. The 30-year muni-to-Treasury ratio fell slightly to 105.8% on Thursday from 107.3% on Monday.
So far this year, the yield curve has flattened while yield spreads have compressed, according to J.R. Rieger, vice president of fixed income indexes at Standard & Poor’s.
The difference in yields between the Standard & Poor’s AMT-Free Municipal Series 2013 index and the 2021 index moved to 213 basis points on Thursday from 225 basis points at the beginning of the year.
The spread between high yield municipal bonds and investment grade munis has tightened by 50 basis points since the beginning of the year. “The spread narrowing indicates the market is willing to take on more risk for higher yield,” Rieger said.
