NEW YORK – The tax-exempt market continues to take direction from Treasuries as lack of supply creates a supply-demand imbalance
“There is still no supply and Treasuries are up huge so everyone is grabbing for bonds today,” a Chicago trader said. “Bottom line is there is just a real drought with any kind of new offerings so we are going to stay firm as Treasuries rally.”
Munis continued to firm Monday early afternoon, according to the Municipal Market Data scale. Yields on the two-year to four-year fell two basis points while the five-year yield fell up to three basis points. The six-year yield dropped between two and four basis points and the seven-year yield plunged between three and five basis points. Outside eight years, yield plummeted between three and six basis points.
On Friday, the 10-year yield fell two basis points to 1.77% while the 30-year yield dropped four basis points to 3.23%. The two-year muni yield closed steady at 0.35% for its 11th consecutive trading session.
Treasuries continued to rally on European woes. The benchmark 10-year yield fell eight basis points to 1.82% and the 30-year yield fell 11 basis points to 2.96%. The two-year was steady at 0.22%.
In the primary market this week, $3.96 billion in bonds are expected to hit the market, up from last week’s $3.5 billion. On the negotiated calendar, $2.57 billion is expected to be priced, down from last week’ revised $2.82 billion. About $1.38 billion of competitive deals are expected, up from $673.8 million last week.
In the secondary market, trades reported by the Municipal Securities Rulemaking Board showed firming in the last trading day.
Bonds from an interdealer trade of Sharyland, Texas, Independent School District 5s of 2025 yielded 2.24%, 12 basis points lower than where they traded Friday.
Bonds from another interdealer trade of Massachusetts State School Building Authority 5s of 2041 yielded 3.42%, 10 basis points lower than where they traded Friday.
A dealer bought from a customer Massachusetts 5.25s of 2025 at 1.58%, 4 basis points lower than where they traded Friday.
Munis have gotten more expensive on the short-end as muni-to-Treasury ratios on the five-year and 10-year have increased. Over the past week, the five-year ratio jumped to 98.7% from 92.1% and the 10-year ratio has risen to 93.7% from 90.1%. Ratios on the long-end have risen as munis have outperformed Treasuries. The 30-year muni-to-Treasury ratio fell to 105.6% from 107.7% the week prior.
The yield curve has fallen significantly in the past week. On Friday, the 10- to 30-year slope fell to 146 basis points from 151 basis points the year prior.
“This is notable because this slope has exhibited a slow, but steady, decline since the beginning of January when it began the year at plus 169 basis points,” wrote MMD’s Daniel Berger. “Perhaps this is attributable to the Fed’s operation twist policy step, which is only about halfway through. Should it continue, it will put downward pressure on long-term interest rates.”
