Though 10-, 20-, and 30-year tax-exempt yields all declined to record-low levels Friday for the second consecutive day, trading in the secondary market was light, leaving some participants hesitant to call the day's levels anything but flat.
"There's been so little trading that a lot of guys don't want to bump the scale," a trader in Los Angeles said. "It definitely feels firmer, but I'm not sure how legitimate this bump is, giving the trading volume."
The Municipal Market Data triple-A scale yielded a record-low 2.29% in 10 years and a record-low 3.39% in 20 years Friday, following levels of 2.30% and 3.42% Wednesday. The scale yielded 3.75% in 30 years Friday, also a new record, following 3.78% Wednesday.
Friday's levels represent the ninth straight historical low for 10-year munis, and the second consecutive all-time low for 20- and 30-year tax-exempts.
"We're actually pretty flat," a trader in New York said. "The secondary is really quiet; there's pretty much nothing trading. The tone is obviously still firmer, and we may end up picking up a basis point or two before all is said and done, but for now, I'd call it mostly flat."
Friday's triple-A muni scale in 10 years was at 87.7% of comparable Treasuries and 30-year munis were at 102.5%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 113.6% of the comparable London Interbank Offered Rate.
The Treasury market showed some losses Friday. The benchmark 10-year note was quoted near the end of the session at 2.61% after opening at 2.58%. The 30-year bond was quoted near the end of the session at 3.66% after opening at 3.65%. The two-year note was quoted near the end of the session at 0.50% after opening at 0.48%.
In a research note, John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney, wrote: "It's no secret to municipal market participants that recent yield declines have been primarily attributed to the blistering performance of the U.S. Treasury market as of late."
"It is also true that changes in bond market sentiment have been increasingly volatile following the financial crisis," he wrote. "One needn't look further than the 4.00% yield on the 10-year Treasury in early April versus the 2.58% of mid-August for evidence of this rapidly shifting sentiment."
"Meanwhile, technical factors supporting the municipal market remain firmly in place," he wrote.
"Seasonal patterns and the encroachment of Build America Bonds issuance have sharply crimped tax-exempt bond supply, with little relief in sight," he wrote. "Separately, rising federal tax rates for upper income taxpayers, the core buyer of tax exempts, still loom in 2011."
"Individual investors, who often do not place as much emphasis on relative value, appear to be less enamored with the lower yields," he added.
"As long as positive fund flows continue and relative value persists, we will have some noteworthy support for new issues, which is supportive of the rest of the market; but without direct interest from individual investors, an important backstop has, at least temporarily, been removed," Dillon wrote.
In the new-issue market Friday, Piper Jaffray & Co. priced $271.4 million of certificates of participation for the Minnesota tax and anticipation borrowing program.
The debt matures in Sept. 2011 and yields 0.35% with a 2% coupon.
The credit is rated MIG-1 by Moody's Investors Service and SP-1-plus by Standard & Poor's. The economic calendar was light Friday.