The stability of the muni market was on display again this week, even as the risk of increased supply took hold of investor sentiment.
Last week saw municipal bonds follow the rally in Treasuries; this week, munis stepped back, again following Treasuries. In each case, movement among tax-exempts was more subtle.
While 10-year and 30-year Treasury yields jumped 10 and five basis points from Friday to Thursday, respectively, tax-exempt rates only ticked up five basis points for the 10-year spot and four basis points for the 30-year spot, according to Municipal Market Data.
The Bond Buyer’s weekly indexes exemplify this outperformance even more clearly.
The Bond Buyer’s 20-bond general obligation index of 20-year general obligation bond yields rose two basis points this week to 4.07%. In the previous week, the index fell nine basis points, reversing a 31 basis point climb over the previous two weeks.
The Bond Buyer’s 11-bond GO index of higher-grade 20-year GOs ascended two basis points to 3.80%.
In the week before, it fell eight basis points. It too had jumped 31 basis points over the previous two weeks, though in the three weeks before, it fell 64 basis points its lowest level since April 1967.
The Bond Buyer’s revenue bond index, which measures 30-year revenue bond yields, moved four basis points higher to 5.11%. It was previously at its lowest level since Nov. 10, 2010.
The big mover in sentiment this week was the build-up of the forward-looking supply calendar, according to Darci Doneff, head of municipal underwriting at Piper Jaffray & Co.
The Bond Buyer’s 30-day visible supply rose to as much as $11.4 billion, on Tuesday, up from just $3.5 billion on Aug. 26.
“That’s caused some hesitancy on the buy side,” Doneff said. “Muni rates have gotten to all-time lows within the past week and there’s some questioning of whether the market will be able to absorb this supply with the lower reinvestment period that we generally experience in September and October.”
Doneff said rising Treasury rates played more of a role pushing muni rates up late in the week, but investor sentiment was earlier centered on the supply risk.
“Investors are sitting back to address the situation and decide whether to jump in or wait to see how supply will be handled,” she said.
Ashton Goodfield, head of muni trading at DWS Investments, pointed out that this week’s supply — estimated to be around $4.65 billion — was in some respects helpful to the market.
“It’s a lot bigger than in previous weeks, but it’s not huge, and there still isn’t much supply in longer maturities,” she said. “The funny thing is, when we didn’t have much supply a few weeks ago, it was said people weren’t investing because they were waiting for supply.”
Goodfield said supply can generate more trading and doesn’t necessarily hurt the market. It all depends on how the supply is structured and how sustainable the trends are.
“If we had $6 or $7 billion for several weeks, that would hurt the market, but it remains to be seen how much bond supply is coming,” she added.
Two of the weekly indexes even fell this week. The weekly average yield to maturity on The Bond Buyer’s 40-bond muni index, which is based on prices for 40 long-term muni issues, declined two basis points to 5.01%, its lowest level since Nov. 4, 2010. The one-year note index moved down two basis points to 0.28%, matching its record low, last seen on July 20.