NEW YORK – The tax-exempt market is seek direction from the primary market this week as traders look forward to the year-to-date’s largest weekly calendar of new issuance. Despite the anticipated uptick in supply, yields remain near record low levels.
“It was real sideways last week, so there was no bid side,” said a trader in Chicago, adding that this week the market will look to new issues for direction.
“Last week’s new issuance was generally well received and the market is preparing for $7 billion more this week,” wrote Mark Cantrell, managing director at Piper Jaffray. “With the possibility of a building new issue calendar looming, buyers have displayed a bias to be patient with respect to deploying capital at these levels.”
He added that although the new issue supply increase has yet to impact current yields, “a sustained 30-day visible above $10 billion could start to have a negative effect on current muni yields.”
Munis were firmer Monday morning, according to the Municipal Market Data scale. Yields inside seven years were steady while the eight-year to 12-year yields fell up to two basis points. The 13- to 16-year yields were steady while yields outside 17 years fell up to two basis points.
On Friday, the two-year yield ended steady at 0.26%, its record low as recorded by MMD on Feb. 16. The 10-year yield fell one basis point to 1.87% while the 30-year yield fell two basis points to 3.25%.
Treasuries were stronger on negative news from the G20 meeting of finance officials in Mexico over the weekend and more negative news coming out of Greece. The two-year yield fell three basis points to 0.29% while the 30-year yield dropped five basis points to 3.06%. The benchmark 10-year yield plummeted six basis points to 1.93%.
The tax-exempt market can expect $7.2 billion in new deals, up from last week’s revised $4.1 billion. In negotiated deals, the market can expect $5.3 billion, up from last week’s revised $3.1 billion. On the competitive calendar, $1.9 billion is expected, up from last week’s revised $1.1 billion.
Last week, muni-to-Treasury ratios rose as munis underperformed Treasuries and became cheaper. The 10-year ratio jumped to 94.4% from 91% the week prior. The 30-year muni-to-Treasury ratio increased to 104.8% from 102.2%. The five-year ratio was steady at 75.6%.
The 10- to 30-year slope of the curve fell slightly to 138 basis points at the end of the week from 140 basis points the week prior.
Spreads have also tightened across the credit spectrum so far this year. The spreads on the two-year triple-A to single-A munis tightened to 44 basis points on Friday from 56 basis points at the beginning of the year as investors reached further out on the curve for yield. The spread on the 10-year triple-A to single-A munis fell to 90 basis points on Friday from 96 basis points. Similarly, the 30-year triple-A to single-A spread compressed to 83 basis points from 89 basis points at the beginning of the year.
“One interesting, although probably predictable, dynamic that we have been observing is the fairly significant credit spread tightening that has occurred thus far in 2012 – particularly in the A rated category – as buyers continue to reach for extra yield in an exceeding low nominal rate environment,” Cantrell added.
