From high to the low to end of the show: Muni yields fell to records twice in 2019

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While municipal bond volume looks to end the year on a surprisingly high note, muni bond yields unexpectedly hit record lows twice in 2019.

According to Refinitiv Municipal Market Data, the yields on the 10- and 30-year 5% AAA general obligations started the year at 2.27% (its 2019 high) and 2.99%, respectively. The 30-year hit a 2019 high of 3.11% on Jan. 23.

Yields headed down from there.

On Aug. 14, the 10- and 30-year yields fell to record lows of 1.22% and 1.87% and then dropped to new lows on Aug. 28 when they hit 1.21% and 1.83%, respectively.

On Thursday, the 10- and 30-year yields ended at 1.45% and 2.09%, down 85 and 94 basis points from 2.30% and 3.03% on Dec. 26, 2018.

“I would say that munis enjoyed a very strong year thanks to tax reform that capped deductions for state and local taxes, significantly driving up demand for many high-income investors which played out in the form of 50 consecutive weeks of muni fund inflows and underpinned support for tax-exempt paper throughout 2019,” said Greg Saulnier, municipal bond analyst at MMD.

Although it is not very pronounced, the municipal curve has steepened this year. The 10- to 30-year spread was 61 basis points in early August and is now 71 basis points. A steeper curve helps to curry interest in the long end of the curve.

And as of Thursday, municipal volume totaled over $406 billion in 2019, up from $339 billion in 2018.
The Treasury market certainly will behave differently due to the large amounts of paper that need to be placed in that market versus the very strong demand that exists in the muni space for smaller volume.

Early indications are that retail sales have been better than anticipated during this holiday season. Amazon and other retailers had upticks in their respective equities Thursday.

Strong sales also bodes well for state revenues. There will be a more pronounced effect for the states that rely on the sales tax for revenues including Florida, Texas and Washington among others.

Parking space
In a lower-for-longer rate environment, many investors are looking for places to park their cash, according to Janney Capital Markets.

“Various safe-haven assets have seen an uptick in price (to match the three rate cuts this year), and bonds that offer modest credit risk above risk-free debt have been in high demand,” Janney said in a Thursday market comment. “Investors have been looking beyond traditional asset classes to diversify and bolster portfolio returns. That is where taxable munis have come into the picture. The Build America Bonds program in 2009 and 2010 made taxable munis more mainstream, but issuance volumes in the subsequent years were not as exciting.”

Taxable issuance by universities and hospitals created some supply, Janney said, but the pace was much slower until the end of the year.

“This year’s taxable muni issuance has been robust, with fourth quarter issuance in particular showing over $10 billion in taxable issuance each month,” Janney said. “A taxable deal allows issuers more freedom in use of proceeds from the bond issue, along with a different investor base than seen in the traditional tax-free space.

Primary market
There are no major bond sales slated for the rest of this week or into next week for that matter.

However, a bevy of sales have migrated onto the competitive calendar for the week of Jan. 6, 2020, with the New York Metropolitan Transportation Authority leading the slate with $2.4 billion of deals composed of $939.6 million of green revenue bonds and $1.5 billion of bond anticipation notes.

ICI: Muni funds see $2.4B inflow
Long-term municipal bond funds and exchange-traded funds saw a combined inflow of $2.385 billion in the week ended Dec. 18, the Investment Company Institute reported on Thursday.

It was the 50th straight week of inflows into the tax-exempt mutual funds and followed an inflow of $2.291 billion in the previous week.
Long-term muni funds alone saw an inflow of $2.211 billion after an inflow of $2.076 billion in the previous week; ETF muni funds alone saw an inflow of $175 million after an inflow of $215 million in the prior week.

Taxable bond funds saw combined inflows of $7.909 billion in the latest reporting week after revised inflows of $10.192 billion in the previous week.

ICI said the total combined estimated inflows from all long-term mutual funds and ETFs were $9.848 billion after outflows of $855.0 million in the prior week.

Secondary market
Munis were mixed on the MBIS benchmark scale, with yields rising one basis point in the 10-year maturity and falling less than a basis point in the 30-year maturity. High-grades were also mixed, with yields on MBIS AAA scale rising one basis point in the 10-year maturity and falling less than a basis point in the 30-year maturity.

On Refinitiv Municipal Market Data’s AAA benchmark scale, the yield on the 10-year GO remained steady at 1.45% while the 30-year was unchanged at 2.09%.

“The ICE muni yield curve is unchanged in very light volume, as many participants are off today,” ICE Data Services said in a Thursday market comment. “Tobaccos, high-yield, taxables and Puerto Rico are all unchanged.”

The 10-year muni-to-Treasury ratio was calculated at 76.3% while the 30-year muni-to-Treasury ratio stood at 89.4%, according to MMD.

Stocks were little changed as were Treasuries.

The Dow Jones Industrial Average was up about 0.1% as the S&P 500 Index rose 0.3% while the Nasdaq gained 0.6%.

The Treasury three-month was yielding 1.590%, the two-year was yielding 1.629%, the five-year was yielding 1.722%, the 10-year was yielding 1.896% and the 30-year was yielding 2.333%.
Previous session's activity
The MSRB reported 11,481 trades Tuesday on volume of $4.39 billion. The 30-day average trade summary showed on a par amount basis of $11.76 million that customers bought $6.28 million, customers sold $3.44 million and interdealer trades totaled $2.04 million.

New York, California and Texas were most traded, with the Empire State taking 14.787% of the market, the Golden State taking 13.953% and the Lone Star State taking 7.591%.

The most actively traded security was the Southern California Public Power Authority Series 20013B revenue 5s of 2036, which traded 17 times on volume of $10.08 million.

Bond Buyer indexes mostly flat
The weekly average yield to maturity of the Bond Buyer Municipal Bond Index, which is based on 40 long-term bond prices, rose to 3.63% on Thursday from 3.62% in the previous week.

The Bond Buyer's 20-bond GO Index of 20-year general obligation yields was unchanged from 2.74% the week before.

The Bond Buyer's 11-bond GO Index of higher-grade 11-year bonds remained at 2.27% from the prior week while The Revenue Bond Index was steady at 3.21%.

The yield on the U.S. Treasury's 10-year note dipped to 1.90% from 1.91% while the yield on the 30-year Treasury slipped to 2.33% from 2.35% in the prior week.

Treasury auctions notes, bills
The Treasury Department Wednesday auctioned $32 billion of seven-year notes, with a 1 3/4% coupon and a 1.835% high yield, a price of 99.444016. The bid-to-cover ratio was 2.47.

Tenders at the high yield were allotted 77.17%. All competitive tenders at lower yields were accepted in full. The median yield was 1.790%. The low yield was 1.288%.

Treasury also auctioned $35 billion of four-week bills at a 1.555% high yield, a price of 99.879056. The coupon equivalent was 1.583%. The bid-to-cover ratio was 3.31. Tenders at the high rate were allotted 33.13%. The median rate was 1.530%. The low rate was 1.470%.

Treasury also auctioned $35 billion of eight-week bills at a 1.565% high yield, a price of 99.756556. The coupon equivalent was 1.595%. The bid-to-cover ratio was 3.24. Tenders at the high rate were allotted 31.63%. The median rate was 1.530%. The low rate was 1.480%.

Treasury bill announcement
The Treasury Department said Thursday it will auction $42 billion 91-day bills and $36 billion 182-day discount bills Monday.

The 91s settle Jan. 2, and are due April 2, 2020, and the 182s settle Jan. 2, and are due July 2, 2020. Currently, there are $41.989 billion 91-days outstanding and no 182s.

Treasury also announced it will auction $26 billion 52-week bills on Dec. 30. The 52-week bills are dated Jan. 2, 2020, and due Dec. 31, 2020.

John Hallacy and Gary E. Siegel contributed to this report.

Data appearing in this article from Municipal Bond Information Services, including the MBIS municipal bond index, is available on The Bond Buyer Data Workstation.

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Secondary bond market Municipal bond funds Primary bond market State of California State of New York State of Texas Metropolitan Transportation Authority
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