NEW YORK — Whipsawing financial markets have been confusing investors for the better part of the past two weeks.
That’s left municipal securities in a tough spot, and helps to explain why Friday’s trading session has so far been a subdued one.
To begin with, an unsettled economic picture has shaken up the equities markets. A roiling stock market, in turn, has investors seeking the relative safety of Treasuries. And because of all of the interest shown to them, Treasuries have had some large rallies, leaving them relatively expensive.
Now munis are catching up, rallying enough so that the benchmark 10-year muni yield reached a record low Thursday. And their ratios to Treasuries, while off records achieved earlier this month, are still very attractive. But all of that rallying has left munis’ nominal yields almost prohibitively low.
Add to this the fact that there is little new issuance to provide any direction for prices, and lots of cash ready to be put to use, now munis are a difficult choice for investors to make: attractive, yet expensive and, at the moment, without a discernable direction.
“Muni nominal yields might be cheap compared to Treasuries, but not cheap enough for people to care right now,” a trader in New York said. “If it stays like this for a month or two, maybe people will change their minds. [Investors] need to figure out what they want to do. It’s a thinking period for a few days.”
Tax-exempt yields, after impressive gains Thursday, were mixed heading into the afternoon, according to the MMD scale. Bonds maturing through 2017, as well as between 2020 and 2027 are unchanged. Debt maturing in 2018 and 2019 is flat to two basis points lower. Maturities beyond 2027 are flat to one basis point higher.
Muni yields plummeted across all but the front of the curve on the day. The 10-year muni yield slipped seven basis points to 2.15%, its lowest level ever recorded on MMD. Its equivalent yield on the competing scale, Municipal Market Advisors, also reached a record low.
The 30-year muni yield also ticked down seven basis points to 3.78%, its lowest level since Oct. 25. The two-year muni yield remained at 0.30%, its lowest yield in more than 40 years.
Treasury yields have made small moves at different points along the curve, and flattened at the long end. The benchmark 10-year Treasury yield is flat at 2.09%. On Thursday, it fell a few basis points below 2.00% briefly — a record — before softening.
The two-year yield also ticked up one basis point to 0.21, three basis points above its all-time low. The 30-year yield has firmed up four basis points to 3.40%.
New issuance remains in the doldrums. Industry estimates have municipal bonds expected to be sold next week at $3.65 billion versus a revised $4.72 billion this week. With lots of cash still on the sidelines awaiting allocation, the industry has been looking for a boost in volume for price discovery. It hasn’t happened all year, and it likely isn’t happening next week.
